Portfolio Risk Management in an Economic Downturn

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Baker Hill is built on over 35 years of professionalism. Our team of experts have helped drive growth and manage risk during difficult times like the 2008 financial crisis and September 11, 2001. Together, we can navigate the risk and changes of a fluctuating economy. 

During the financial crisis of 2008, when a recession was looking over financial institutions, Baker Hill developed an early warning system to alert banks to degradation in their loan portfolios. As the same situations continue to playout as a result of the COVID-19 pandemic, banks today have a proven solution in Baker Hill NextGen® Portfolio Risk Management.  

As you work to stay profitable and be a resource for your customers, you also have a full portfolio of loans on the books. With both known and unknown amounts of risk associated with those loans, the question on everyone’s mind is how to manage that portfolio in a business environment that no one could have predicted. A tool like Baker Hill NextGen® Portfolio Risk Management runs a set of rules over the loans in your portfolio and alerts you to any early indicators of credit quality deterioration. 

Times have changed, even before an international pandemic rocked the world. Our banking processes and how we monitor risk must evolve. By taking advantage of some modifications in how you manage your portfolio you will be able to navigate these current storms. 

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Continuous Monitoring

Minimizing risk and maximizing opportunity within your loan portfolio is the goal of any portfolio risk management initiative. By getting a complete view of the credit and operational risk associated with a credit relationship or a portfolio segment, lenders can make better decisions. 

From there, monitoring and tracking can be made into actionable steps by leveraging internal and external data. 

  • While helping clients to stay in business and gain needed capital is key, it is also crucial to monitor what is happening with your loan portfolio at a loan level, client level, and holistically.  
  • Proactive portfolio management is not new, although it may be to your institution. As you move into streamlining requirements for loan requests using credit scoring, approving, and rewriting requests with stale tax returns, it is important to monitor the portfolio daily. 
  • The challenge of monitoring risk continuously is that doing so manually is impossible and completely impractical. Not only does it rack up additional costs for the institution, but it leads to inaccuracies. 

Automating these processes helps alleviate these headaches, while also effectively and efficiently monitoring for risk. Plus, institutions are no longer relying on staff to manually input data – they can focus on other areas of the business.  

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Portfolio Risk Management

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Risk Tolerance

No one knows exactly how the economic forces will play out. But what we do know is that it will impact all parts of a loan portfolio. Financial institutions need to determine new tolerances of risk, determine which clients they can stretch for, and determine which standard credit underwriting items can be forgone for the time being. This can be done by analyzing the portfolio to see where there is room to negotiate and where there is not. 

As clients begin to reach out for assistance during the economic slowdown, it is important to have a strategic understanding of how your financial institution will respond to these requests.  

  • Decide your financial institution’s tolerance for additional risk by identifying which industries or business types are you comfortable stretching your standard requirements. 
  • Determine how to account for the additional risk. Choose if you willing to forego full underwriting, financial statements, etc. and how will this impact your risk ratings and loan loss reserve. 
  • Establish your non-negotiables. During this time, are you standing firm on your amortization for certain types of collateral or are you unwilling to accept the waiver of personal guarantees?

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Communication Strategy

As clients begin to reach out for assistance during the economic slowdown, it is important to have a strategic understanding of how your financial institution will respond to these requests. Customer communication is more seamless through digital efforts, allowing them to trust the bank or credit union to guide them through an unknown experience. 

  • Create a plan for communicating with clients. Are you proactively reaching out to clients or waiting for them to come to you? 
  • Determine who will lead the conversation. Will each lender answer questions or should you centralize those conversations?  
  • Coordinate information with borrowers, influencers in their markets like attorneys and accountants, and other community coalitions to help make sure everyone is on the same page as much as possible. 

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Government Guarantees

If you don’t currently have an SBA specialist and are unable to hire one at this time, you can work with third-party vendors that specialize in SBA and other government guaranteed lending. With no in-house specialist, it is crucial to assign at least one employee, if not more, to the task of staying up to date on government programs and to coordinate with any third-party vendors. 

  • The federal government is actively working to put out funds for small businesses across the US, and it is highly likely that the states are not far behind.  
  • Understanding what options are available to your financial institution will be important to support your small business clients. 

It’s important to remember an SBA or other government guarantees cannot fix a bad loan, but it can help you to understand all the risks. 

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Digital Portals

Digital portals allow for secure uploads of financials and appraisals, along with other key documents. Processes like automated financial statement spreading will free up your borrowers time to focus on their urgent business needs while simultaneously providing you updates on a more frequent basis into the activity (or lack of) in your borrower’s financials – especially those small business borrowers. 

  • Leveraging digital tools also allows for financial institutions to put the client first, responding to inquiries faster and providing their customers with peace of mind. 
  • With a powerful customer relationship management system in place, you can stay appraised of what is happening in your borrowers’ businesses and be ready to have candid conversations 

With the sudden shift to remote work and contactless banking, it’s more imperative than ever that banks and credit unions invest in digital portals with expert partners. 

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Closing Summary

During times of turmoil, customers look to their local financial institutions to help them maintain confidence that everything will be okay. In the current environment, it is easy to get overwhelmed. Finding the right solution partner, along with sound policy and practices, can aid in addressing the challenges. To that end, banks need to have partners in their business to help them thrive, even during a crisis. Baker Hill is here to be that trusted partner. Our team of seasoned experts are always ready to help.  

As you work to stay profitable and be a resource for your customers, reducing portfolio risk management must stay top of mind. Request a consultation to see how Baker Hill NextGen® Portfolio Risk Management can help.

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Built on over 35 years of industry experience, Baker Hill delivers cutting-edge banking solutions that empower financial institutions to generate growth, reduce risk, and improve productivity and profitability.

A trusted leader in financial technology, our innovative solution streamlines origination and portfolio management for business and consumer lending, while our award-winning business intelligence tools mitigate risk and generate growth—all through a single, integrated platform.

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