42 MAY / JUNE 2021 Triaging Your Institution For credit and liquidity health Earl Charneske SVP & Midwest Regional Manager PCBB echarneske@pcbb.com PCBB is an associate member of the Indiana Bankers Association. DIRECTORS / SENIOR MANAGEMENT Being a member of the C-suite can be demanding, as you are responsible for the health and resiliency of your institution. The challenge in leading any organization is ensuring that the right questions are asked, the right priorities are set, and the right amounts of resources are allocated. Choosing the right priorities is not unlike triaging patients in a busy emergency room on a Saturday night. Make the right choices, in the right order, and people thrive. Miss an important symptom, and the consequences may be dire. In this credit cycle, how do you triage quickly? This will depend on your institution’s current situation. Address regulatory orders. First and foremost, you will want to respond to any regulatory orders or any open examination issues. Are examiners asking you detailed questions about debt coverage ratios or changes in your customers’ FICO scores since the start of the pandemic? Are you being asked repeated questions about certain segment concentrations? If that’s the case, this is urgent and needs to be handled ASAP. So how do you best handle it? The answer is with a loan portfolio bottom-up, detailed stress test – one that will provide you and your institution with specific, supportable results by showing the different stressed scenarios and their impact on your capital. You should also dig deep into cash flows, the borrowers’ statements and their supply chains. If you have the resources and the time, then this is your top internal priority. If you don’t have time or you’re missing information, then a third party can help. Demonstrate resiliency. Triaging to the next level – urgent but not critical – you will need to be prepared to satisfy examiner expectations for institution resiliency. Examiners are going to ask specifically about the effects of the pandemic and government actions on your loan portfolio, earnings and capital. While this can be answered with a bottom-up loan portfolio stress test, a faster alternative is a complete, quick top-down test. This approach uses the historical relationship between unemployment, gross domestic product and industry data loss rates. Using multivariate regression combined with future forecasts, you can quickly generate estimated loss rates. If the relationship between GSP (gross state product), state unemployment and loss rates remains highly correlated, state data can be used instead of national data. Loans can also be segmented by industry classifications. Recovery scenarios. The next step is to decide which recovery scenarios are the most likely to show adequate stress on your portfolio. While the larger banks are moving away from letter-shaped recoveries (V, U, L, K, etc.), whichever scenario makes the most sense to your portfolio will depend on a number of factors, including industry concentrations and borrowers’ behaviors. If your loan portfolio is heavy in hospitality or retail, your recovery may look closer to the L-shaped recovery of the Great Recession. If it is focused on suburban single-family, you may experience a strong V-shaped recovery (if construction supplies aren’t too dear). Furthermore, depending on how supply chain interactions are affecting your local economy, you may be experiencing different loss rates within loan segments that were historically uniform. When you’re asked about your resiliency and your return to “normal,” you will know the answer with this swift top-down approach. Using the same regression
RkJQdWJsaXNoZXIy MTg3NDExNQ==