Credit Quality During a Pandemic
As the pandemic lingers, banks are increasingly challenged with balancing how to meet borrower needs while protecting the bank from increased credit risk. The pandemic’s impact on credit quality may not be fully felt until well into next year, but prudent practices now may help lessen potential credit issues then. Also, regulators are advising banks to be cautious and keep their loan administration and underwriting practices up to expectations.
There are many proactive steps the BBOK Financial Services independent loan review team encourages banks to take during this time.
- Many borrowers have taken advantage of payment modifications or other credit reliefs offered by lenders. And more may be needed. As an institution, consider flagging these borrowers to closely monitor performance. The FDIC has stated financial institutions will not be criticized for taking reasonable pre-emptive actions to mitigate the adverse effects of the pandemic on borrowers.
- Identify high-risk sectors, such as hotels, restaurants and food franchises, small retail businesses and office buildings. Is your portfolio concentrated in these areas? If so, keep concessions as short term as possible, and request ongoing interim information from borrowers so you can appropriately monitor performance and stay informed as conditions evolve.
- Create a plan that provides for stress testing of various segments in your commercial portfolio to anticipate the risk-rate changes that will be required for certain borrowers in troubled industries.
- Identify and confirm borrowers’ availability to liquidity.
- Contact borrowers with operating lines of credit to work through their individual status and help determine what may be required in the near and long term.
- After year-end, consider obtaining company-prepared profit-and-loss or income statements if the borrower’s tax data is not quickly available.
Now more than ever, it may be time to reassess the scope of your loan reviews. Should borrowers requesting or requiring modifications be a part of the current year loan review? Do you have enough depth in the sample of higher risk markets to accurately ascertain risk? Is your current review sample percentage a sufficient representation of the overall quality of your portfolio? Can external resources assist your internal review department to verify risk ratings?
Regulators continue to encourage independent loan quality assessments for a broader range of banks, and current conditions will likely heighten the expectations for monitoring and evaluation of credit quality and portfolio risk.
For assistance addressing any loan review questions, call BBOK Financial Services Todd Schoenhofer at 800.999.5725.