During the most recent offering of RMA’s Credit Risk Management Audio Conference Series, three senior credit officers shared the issues they are facing today. Richard Barbercheck, Chief Credit Officer, First Financial Bank, described the current credit environment as “too many dollars chasing too few deals.” Not uncommon following a recessionary period, but for a variety of reasons, this has been a very sluggish and protracted recovery.
That presents a systemic problem. The typical period where accommodations are made to regenerate earning assets has been extended three to four years. Therefore, the industry has typical recovery period activity on steroids. This results in lower margins on loans and a higher percentage of credit with policy, underwriting, and structural exceptions. Hence, there is longer term stress on earnings and greater potential for future credit problems.
Additionally, the extended period where we strive to regenerate earning asset volumes has led to portfolio diversification efforts. Think about the current efforts to begin specialized programs for ABL lending, franchise lending, cash flow/mezzanine, equipment leasing, indirect auto, etc. None of these lending portfolios are “bad”, but banks can’t be all things to all people. Therefore, banks should ensure they’ve secured the right skill set to really know what they’re doing in a new space. It’s specialized for a reason. Barbercheck offered suggestions for success:
- Enlist a strong effort and support to stick to lending disciplines; mitigate appropriately; and remember, in the long run, earnings win over volume.
- If you diversify, approach with caution and your eyes wide open. Implement appropriate limits and controls.
- Watch the incentive programs; pay only for that which you want, nothing else.
- Stress test credits and the portfolios. Regardless of your regulatory environment, think about what happens when interest rates rise or a global economy falters.
Liam M. Brickley, Chief Credit Officer, First Niagara Financial Group, touched upon the systemic risk associated with the current environment that Barbercheck described. He indicated that today’s credit professionals are not only concerned with “deal, deal, deal”, but with “data, data, data.” Long tail risks that will hurt the industry over the next decade include rate risk, cap risk, and collateral risk. Regulators are focusing on organizational sustainability, emphasizing process, procedure, and documentation related to stress testing initiatives. They are deep diving into loan level data and determining the data’s usability for supporting stress testing, for ALLL analysis, and for decision-making by the Board.
In considering future risks, has the industry actually learned anything from the last crisis? J. Tol Broome, Jr., Director of Regional Corporate Banking, BB&T Bank, stated that some would argue no because of the saturation in multi-family, health care and higher education and non-profit lending, auto sub-prime lending, and C&I leveraged lending. Many banks are jumping into these markets and lending types without knowing much about them and not sticking to core competencies.
For additional insight into the risks facing bankers today, attend sessions on similar topics at this year’s Annual Risk Management Conference, October 26-28, Washington D.C.
Join us for the next offering in the Credit Risk Management Audio Conference Series on Wednesday, November 12, Talent Management: Training and Retention Issues.
