David Ruffin is Principal of IntelliCredit, a division of QwickRate. He has extensive experience in the financial industry including a long and pronounced emphasis on credit risk in a variety of roles that range from bank lender and senior credit officer to co-founder of the successful Credit Risk Management, LLC consultancy and professor at several banking schools. cycle are the most toxic” has become a valuable lesson on loan vintages – especially after the credit quality issues banks experienced during the Great Recession. Recommendation: Lending, not unlike banking itself, is a balancing game. This should be the time when management teams and boards rededicate themselves to concurrent growth and risk management credit strategies, ensuring that any growth initiatives the bank undertakes are complemented by appropriate risk due diligence. 4. Stakeholders may overreact to any uptick in credit stress. Given the current risk quality metrics, banker complacency is predictable and understandable. But regulators know, and bankers should understand, that these metrics are trailing indicators, and do not reflect the future impact of emerging, post-pandemic red flags that suggest heightened economic challenges ahead. A second, unexpected consequence resulting from more than a decade of good credit quality is the potential for unwarranted overreactions to a bank’s first signs of credit degradation, no matter how incremental. Recommendation: It would be better for investors, peers and certainly regulators to temper their instincts to overreact, particularly given the banking industry’s substantial cushion of post Dodd-Frank capital and reserves. In summary, no one knows the extent of credit challenges to come. Still, respected industry leaders are uttering the word “recession” with increasing frequency. Regarding its two mandates to manage employment and inflation, the Fed right now is clearly biased toward the latter. In the meantime, this strategy could sacrifice banks’ credit quality. With that possibility in mind, my advice is for directors and management teams to position your bank ahead of the curve, and be prepared to write your own credit risk management scripts – before outside stakeholders do it for you. Bill Lloyd Call me at 573.268.5172 – Based in Columbia, MO Serving Missouri and Kansas 34604 AD- Community Bankers Association of Kansas 2022_Bill Lloyd_OT.indd 1 4/12/22 2:24 PM 15 ISSUE 3 | 2022
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