Part 1
Many banks are scrambling to determine how best to address credit issues in their portfolios. It seems that, when one fire gets put out, there is another one right behind it. Best practice dictates that a financial institution should not simply try to review the entire portfolio to assess which borrowers are in trouble, which ones have the potential for problems and which ones are okay. This traditional approach takes too much time and it diverts resources to an exercise that does not produce objective, timely identification of problems (that either exist currently or may start to develop in the near future).
I recommend that financial institutions systematically identify looming risks in a portfolio -- and take swift and appropriate action to mitigate and manage those risks. While you may not be able to eliminate risk, you can definitely minimize it and deploy risk management solutions.
Don’t panic. We tend to make poor decisions when we are in panic mode. There are still good loans out there. Unfortunately – and fortunately – there seem to be problem loans everywhere we turn. Unfortunately, we have to bear the expense of related charge-offs. Fortunately, though, we can learn from – and benefit from – what happened to these problem loans. This demands examination of the data. Analyze what went wrong.
Identify which loans are still performing and seek out more of those types of credits. Don’t shut down the production. From a pure statistics viewpoint, you are only accentuating the problem. When you stop feeding the portfolio with new loans (and given the typical run-off of a portfolio), your past dues and charge-offs actually trend worse. In each case, the denominator in the formula is the total portfolio dollars outstanding. As you shrink the portfolio, by significantly reducing the loan production, you are actually decreasing the number by which you are comparing your problem loans. Basically, you are letting the good loans run-off while you are left with the bad.
Look for industries that are still performing well in these economic times. There are counter-cyclical industries that do well in poor economic conditions.
Get aggressive about identifying potential problems early. This is done through regular rescoring of your loan portfolio and watching for negative behaviors. Early intervention means a potential reduction in actual loss (if the loss in inevitable).
Be careful that you do not get too aggressive and start to push away good business. Even good accounts (that you would seek out in good times) may experience occasional problems – don’t drive them off.
Many banks are scrambling to determine how best to address credit issues in their portfolios. It seems that, when one fire gets put out, there is another one right behind it. Best practice dictates that a financial institution should not simply try to review the entire portfolio to assess which borrowers are in trouble, which ones have the potential for problems and which ones are okay. This traditional approach takes too much time and it diverts resources to an exercise that does not produce objective, timely identification of problems (that either exist currently or may start to develop in the near future).
I recommend that financial institutions systematically identify looming risks in a portfolio -- and take swift and appropriate action to mitigate and manage those risks. While you may not be able to eliminate risk, you can definitely minimize it and deploy risk management solutions.
Don’t panic. We tend to make poor decisions when we are in panic mode. There are still good loans out there. Unfortunately – and fortunately – there seem to be problem loans everywhere we turn. Unfortunately, we have to bear the expense of related charge-offs. Fortunately, though, we can learn from – and benefit from – what happened to these problem loans. This demands examination of the data. Analyze what went wrong.
Identify which loans are still performing and seek out more of those types of credits. Don’t shut down the production. From a pure statistics viewpoint, you are only accentuating the problem. When you stop feeding the portfolio with new loans (and given the typical run-off of a portfolio), your past dues and charge-offs actually trend worse. In each case, the denominator in the formula is the total portfolio dollars outstanding. As you shrink the portfolio, by significantly reducing the loan production, you are actually decreasing the number by which you are comparing your problem loans. Basically, you are letting the good loans run-off while you are left with the bad.
Look for industries that are still performing well in these economic times. There are counter-cyclical industries that do well in poor economic conditions.
Get aggressive about identifying potential problems early. This is done through regular rescoring of your loan portfolio and watching for negative behaviors. Early intervention means a potential reduction in actual loss (if the loss in inevitable).
Be careful that you do not get too aggressive and start to push away good business. Even good accounts (that you would seek out in good times) may experience occasional problems – don’t drive them off.
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