Actions your community bank can take during economic uncertainty
We all understand that the U.S. economy is facing some substantial challenges — large bank asset write - downs, weak housing markets, high oil prices, devalued dollar, stock market volatility - to name a few.
Given all that bad news,
what should community bankers do during these difficult economic times to
ensure their bank isn’t surprised by credit losses?
Credit and liquidity
problems develop quickly for a bank’s loan customers. Most provide annual
financial data and tax returns that loan officers use to monitor their
repayment ability. It’s the speedy development of issues that can surprise the
banker, like when the borrower comes into the bank and hands over the keys
because his cash flow is nonexistent.
Some banks had credit risks
that were piling up just waiting for the “right” set of circumstances to show
themselves. Fortunately, most banks have a strong capital position that will
allow them to deal with the challenges that the current economic climate
creates.
There are some actions you
can take to strengthen your bank’s monitoring of credit risk and minimize your
loss exposure:
- Segment your loan portfolio
using factors that would allow loans with similar risk characteristics to be grouped together for monitoring. Those risk characteristics would include
collateral type, borrower, industry or type of loan. Whatever segmentation you
use make sure it helps identify the credit risk.
- Obtain current and relevant
financial data from the borrower that will allow your loan officers to identify
deteriorating trends on a timelier basis. This may mean requiring monthly or
quarterly financial data or highlights.
- Establish a review process
that ties financial performance to future draws on master notes or lines of
credit. The bank should also have a process that allows for draws to be tied to
some “milestones” of the project.
- Have a strong workout
department that gets an early “hand off” of the credits that are performing on
a subpar basis. This will allow the workout group time to identify and pursue
alternatives rather than function as a “build out” group to maximize the bank’s
recovery.
