By John McKay, Senior Manager and Kevin Garcia, Senior Manager Plante Moran Effective Credit Risk Monitoring in the Post-Pandemic Economy As COVID-19 continues to affect individuals, communities, and global economies, financial institutions must continually adapt their credit risk monitoring strategies to effectively identify as quickly as possible those loans that have increased in risk. These strategies can help. The COVID-19 pandemic forced individuals and businesses to continually adapt to a “next normal,” and financial institutions are no exception. While credit risk in the banking industry has, for the most part, remained surprisingly stable throughout this volatile time, the pandemic has driven significant changes in the way financial institutions evaluate credit risk and monitor for signs of deterioration in their existing loan portfolios. Loan approval is just the beginning of credit risk monitoring Prior to COVID-19, most financial institutions could reliably determine how they would monitor a loan’s performance and assess changes in the borrower’s risk profile when they approved the loan. Lenders could use the information gained from the application process to determine what tests could effectively monitor the loan and how frequently to apply them. Tried and true methods could range from an analysis of tax returns and financial statements on an annual basis for low-risk loans to more frequent and thorough tools such as covenant compliance checks, evaluation of borrowing base certificates, or the preparation of quarterly or even monthly financial statements. Smaller or less risky loans may be handled on an exception basis only, requiring action only when adverse information is received, such as notification of a judgment, lien, or low credit agency score. The pandemic has driven home to lenders just how quickly the quality of a loan can deteriorate and how www.coloradobankers.org 12
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