Hit with many late payments, deferrals, and now defaults, how does a bank effectively manage its credit risk? It establishes processes that support proactive action and regulatory compliance. It all starts with credit administration and these four actions.
You might feel like your bank is drowning in paperwork, but you need to make sure to record your PPP and deferral loan data. Though the process of scanning documents and uploading data might feel like it is slowing things down, this information is important and needs to be available electronically. Having it buried in a stack of paperwork isn’t going to help anyone.
There are early warning signs. The data in your past-due loan reports, document reminders, insurance, real estate taxes, and deposit activity all should be monitored regularly. Make sure your staff knows what to look for and keeps watch. Pay attention to these and then act when they indicate you might have a problem.
Observe and record your qualitative data. Executives, lenders, and portfolio managers each have accountability and need to be very active participants in this environment.
Make sure to collect, scan, and upload historical financials and ask lots of questions. Ask your borrowers to update you frequently, including reporting their operating and capital budgets. Request they provide you with new information in the form of liquidity verification, projections, 13-week cash flow, field exams, and maybe even a site inspection if social distancing can be enforced.
Even before disruption hit and the economy was paused, the U.S. Department of the Treasury's Office of the Comptroller of the Currency was working through risk identification and theme assessments in its May 8, 2020, interagency guidance on the topic. The guidance was well timed given the pandemic, but the regulatory agencies had begun their review process back in October 2019.
This focus underscores the significance of effective credit risk management to regulators. Financial services companies simply cannot afford to take a watch-and-see approach. They must actively work to manage risk and make sure they have effective credit risk review systems in place.
