Why a Special Assets Officer Could Be Key to Surviving an Economic Downswing

Why a Special Assets Officer Could Be Key to Surviving an Economic Downswing

Like many of you, I earnestly read the Fall 2019 Semiannual Risk Perspective published by the Office of the Comptroller of the Currency (OCC). While it does mention how well the economy is doing and how sound the banking sector currently is, one point that stuck out to me was the mention of being prepared for a cyclical change. While I agree that financial institutions should be prepared for a downturn, and problems within their portfolios, as a special assets guy my philosophy is to just always be prepared. However, there are a few steps that a financial institution can take in order to prepare for a change in the market.

Before we dive into that, let’s talk about the signs that are pointing as to why this is necessary. There are a couple reasons why a financial institution should be gearing up to be a little more proactive with their portfolio management. This is the longest economic recovery in our lifetime so it stands to reason that would slow down at some point and there are a few indicators pointing to that happening.  Commodity prices have been slow for some time, tariffs have had a negative effect on farm revenues, and there was even talk of yield curve inversions and recessions earlier in 2019. The 2008 financial crisis caught many financial institutions off guard and with no plan on how to manage their credits if those credits were not performing. One solution was that non-performing portfolios gravitated to senior lenders or individuals with the most credit experience. In order to not have unpreparedness repeat itself, one take away from that would be that a financial institution might consider seeing what kind of up and coming talent would be eligible to be a Special Asset Officer. This role could be crucial in preventing similar consequences of previous market downswings, as managing problems in a credit portfolio could be crucial for sustained success.

What should you look for in a Special Asset Officer to manage those problems? One key component to consider would be experience, as loan officers in this part of the bank should be very familiar with all aspects of the institution and how they are interrelated.  Another desirable aspect would be excellent credit skills, as being able to identify structural issues inherent in credit or determining if the repayments match up with cash flows of the company will be important in determining if the credit facility itself is partly to blame for a non-performing loan. A Special Asset Officer should be able to determine if a loan was designed to accomplish its goal and being in the best interest of the company at origination. Essentially, the Special Assets Officer should be able to ascertain information like if they loan was underwritten correctly, if the financial institution missed something in analysis that lead to an approval that shouldn’t have happened, if there were multiple exceptions in the credit memo, and if the risk was assessed correctly.

Special Assets Officers also must be strategic. Not every bad loan indicates a bad client and the Special Assets Officers should be able to determine when it’s time to help a client get through the rough patch and if other appropriation action should be taken. At the end of the day though, helping a client get back to profitability is a rewarding outcome for all parties.

Special Assets is a unique position in the Financial industry. Requiring a level high level of mental acumen and periodically a very thick skin, it is a demanding position that deals with the hardest aspects of credit in and institution, none of which are ever very easily solved. At the end of the day, the economy will do what it’s going to do. In order to be the most prepared, start thinking about what your institution’s plan is for when things get tighter and see if your bench is strong enough to handle what may come, especially in the Special Assets position.