By Jay Kenney, SVP, Southwest Regional Manager, PCBB Between the pandemic and rising inflation and interest rates, the last two years have taken community banks on a wild ride. Rising inflation and the higher interest rates designed to bring inflation back to earth have influenced cash flow and the cost of goods, which can create financial stress for borrowers. Financial stress can then lead to credit stress, a problem for both community banks and their customers. Multiple Challenges in Credit Risk The problem isn’t just that economic circumstances may push some borrowers towards payment tardiness or default. Community banks are seeing: • Varying credit quality by market sectors and subsectors. Some business areas have been hit hard by the pandemic, rising inflation, and/or higher interest rates. Other sectors, like those deemed essential businesses, have remained remarkably unscathed. • Difficulty discerning the creditworthiness of different potential borrowers in those sectors and subsectors. For instance, businesses in travel and tourism found pandemic-related lockdowns in 2020 and 2021 very challenging. Some of those businesses have rebounded since then, such as cruise ship traveling, which saw share prices jump after pandemic safety protocols were removed this past summer. Other travelrelated industries haven’t been as lucky, such as the hotel sector, with lingering staff shortages that caused some hotels to close or leave a portion of rooms unsold. SIX STRATEGIES TO NAVIGATE CREDIT STRESS 12
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