To say that COVID-19 has presented banking with challenges would be a gross understatement. The problems we now face are unprecedented, and that alone creates a host of new ones we have never had to address. While the 2008 financial crisis was large and unexpected, its general contours were well within the realm of our basic financial understanding. Unfortunately, we do not have that luxury right now and some of our basic econometric tools are ill-equipped to help us with this problem.
So that leaves us with the natural question, "What CAN we do?"
One of the first things we recognized was that the unique nature of this crisis requires a unique solution. A critical component is (to the degree possible) being able to hit "pause" on the financial sector for 1-2 months. Tenants can't pay rent but if landlords don't have to pay a mortgage then their flexibility in working with their tenants increases dramatically. This same thought process applies in varying degrees to almost all businesses.
As a result, the first step many of our customers have taken is to make appropriate changes to their policies and procedures regarding pandemic related loan modifications and payment deferrals. To assist with this, CRMA provided sample language to all customers using our Credit Manual product. As a supporter of the community banking industry, we will continue to make that language available upon request to any community bank.
Identifying businesses and economic sectors that are particularly vulnerable is an important task right now. While a number of the hardest hit segments (airlines, cruise ships and even hotels) rarely make up large components of a community bank’s loan portfolio, there are other business sectors that do pose significant concerns. Probably the largest is in the retail sector where restaurants and non-essential retailers in many states had to close their doors completely during the initial phases of the response. Even if institutions do not have exposure directly, they may be indirectly exposed via their income-producing property portfolio. The reality of approximately 30 million unemployed in the US leads us to believe very few portfolios will not have at least a partial increase in risk profiles.
Credit officers should be culling their portfolios and proactively reaching out to customers about any modifications or deferral options being offered. The regulatory guidance has been very clear that these deferrals will not count as delinquencies if they are performed prior to a delinquency event occurring. Many customers will try to "tough it out" and will not reach out to their banks until they realize they are unable to pay. Communicating early with potentially troubled customers can help mitigate this problem.
Finally, it’s important to take a step back and ask, "How can this affect our bank and our portfolio’s overall health?" That can be difficult, particularly if you do not have adequate historical data. For those who have that data, going back to the 2008-2009 financial crisis can at least provide a baseline elevated level of losses for this crisis. While this is unlikely to be entirely sufficient, it can serve as a benchmark. CRMA's stress testing takes advantage of not only our historical data extending through that timeline, but also our information on some of the hardesthit markets and portfolio segments. This can provide a framework for creating elevated losses for comparison and consideration by bank management in creating a proactive strategy should this crisis extend through May and beyond.
Over our nearly 30-year history, CRMA has supported community banks through trying times. This time will be no different. Managed well, not only will we get through this, but we’ll emerge stronger on the other side. If you would like to talk more or learn about other ways CRMA can help during these difficult and challenging times, call us at 919-573-0237 or email us at firstname.lastname@example.org. As former bankers ourselves, we have a full understanding and appreciation of the nuances associated with the “credit life cycle” as well as the potential negative impacts of this historic pandemic event. Our products are scalable and customdesigned with flexibility to address the specific challenges you’ll soon be facing during this unprecedented economic shock and corresponding uncertain period of stress. As a current client or community banker, we stand ready to assist you in whatever way we can in managing through it.
Jeff Hal is the Executive Vice President of Analytics at CRMa, a leading risk management company. He is a 20-year veteran of banking, credit management, modeling, training and analytics.
CRMa, LLC provides a comprehensive array of credit related products, custom software, and consultative and analytic services. We deliver this “a la carte” and in seamless integration for lending institutions throughout the United States and beyond. Our goal is to identify credit risk objectives, optimize decision making and increase net returns.
Our breadth of expertise combines credit training, underwriting intelligence, policy and regulatory maintenance, loan-to-portfolio risk review and due diligence.Our goal is two-fold: