Which action is part of configuring automated covenant testing?

Setting parameters for performance and financial indicators is a critical step in configuring automated covenant testing. This action involves defining the specific criteria that will be used to evaluate a borrower’s compliance with their financial covenants. These parameters are essential as they determine which financial metrics, such as debt service coverage ratios or loan-to-value ratios, will be monitored and the acceptable ranges for those metrics.

By establishing these indicators, the system can effectively automate the monitoring process, alerting lending officers or analysts when a borrower is not in compliance. This automation enhances operational efficiency, reduces human error, and ensures timely insights into covenant performance. The focus on these indicators is vital because they directly relate to the health and risk profile of the commercial loans being monitored, aiding in proactive risk management and decision-making.