Special Assets and the New Normal
While today’s downturn is inherently different than the collapse of the financial markets in 2007-2008, its ultimate impact may end up being very similar. With that in mind, we should consider “How should special assets departments be preparing today for tomorrow?“
Washington is determined to get capital to the streets. While many will need the funds as a short term stop gap to help through these times, how will this all shake out months down the road? How should institutions evaluate these potential loan opportunities today? When it comes to Special Assets, there are other concerns to consider as well.
It’s of course beneficial that the government has decided to make low interest funds available to small businesses. Access to these funds will allow many of these companies to remain open, retain employees and bolster overall morale. However, those loans will still need to be evaluated.
We are at a time where the future performance of any company is unknown. Will adding more leverage on a firm’s balance sheet be beneficial in the long run? What happens if the bounce back is not as strong or quick as we all hope? Remember – it took about twelve years to recover from the last crisis. Will an SBA or other guarantee be enough to justify lending to a company with questionable long-term viability? All performance indicators we tend to rely on just became less predictable.
All this uncertainty is why Special Assets should be involved at the origination of these loans. These credits already carry more risk than an institution would traditionally consider, primarily because these firms may not have additional resources (capital) to tap at first. If cash was a little tight prior to COVID-19, it just became a stranglehold with the basic “closure” of all non-essential businesses.
And yet, financial institutions should help these small businesses through this very difficult time. We know there is a high probability the metrics we all use to evaluate repayment are going to be slightly depressed. We know we may not have current financial information at a time of the year we would typically expect it. There will need to be leaps of faith in some of these requests.
Knowing there is help on the backside of riskier credits is more important than ever. Keep in mind that as borrowers are applying for funds to get through this rough patch, there is nothing wrong with an early intervention.
While borrowers and lenders alike are worried, it is still the institution’s job to get these much-needed funds on the street. Having a Special Assets Officer involved as early as origination allows the borrower to know his or her options. It also allows the institution to evaluate how it can work with the borrower if things continue to get tougher. Proactive planning in government guarantees, loan structure, and collateral will be a huge benefit down the road.
If you’d like to learn more, check out this resource from RMA that describes how to foster a good relationship with your special assets group.
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Posted on Friday, March 27, 2020 at 9:00 AM
by Kevin Dooley
As a Senior Business Process Architect, Kevin Dooley guides implementations for new and existing clients. Dooley relies on his 20 years of Commercial Banking and Special Asset experience to support client success. He provides both strategic and tactical recommendations regarding current credit philosophy and assists financial institutions with implementing and executing credit evaluation and portfolio management strategies.
Dooley earned his bachelor’s degree from Purdue University in Political Science and his master’s degree in Finance from Indiana University’s Kelly School of Business.