IBIS World | Tariffs, Supply Chain Stress, Debt and Capricious Policies: A Systematic Approach to Credit Risk Management in a Cacophonous World

Written by Dr. Richard Buczynski, Kent Kirby, Robert Miles, Dev Strischek

Living in a noisy world…

“If everything is important, then nothing is.” Patrick M. Lencioni, author and management consultant

In an insightful LinkedIn post, “Why uncertainty is worse than bad news”, Dr. Enric Bernal writes, “Unknown bad news is the worst (situation) as they can cause rumination and anxiety…”

Made more than five years ago during the onset of the pandemic, this observation seems even more apropos today. The capricious vacillating nature of policy announcements exacerbated by fissures between and within both the Republican and Democratic Parties (note the recent federal shutdown) has unnerved business strategists and risk managers. The maddening daily shifts in tariffs, and other policy pronouncements, along with uncertainties involving precisely how policies will be carried out, have challenged decision-makers’ ability to establish priorities for their business and pursue actionable responses.

Indeed, “If everything is important, then nothing is.”

At times like these, skilled analysts, awash with data and drowning in waves of post-Great Recession models, are stymied, as their informational advantage over senior managers wanes. It’s much more than information overload; we are all being buried under near real time “information” that is both highly volatile, discordant, and just plain noisy. When, for example, have Supreme Court rulings carried so much weight in determining market and economic performance?

And if this isn’t enough, we often become confused by the vagaries of official data updates which are often preliminary estimates subject to revisions that are more pronounced during times of uncertainty and economic shocks. There are also growing concerns that government agency data is becoming less reliable; a trend that could accelerate owing to DOGE’s agency budget cutting.

Here’s something you may not have known: Bureau of Labor Statistics survey response rates have been declining rapidly, further compromising reliability. This not only includes the Household Labor survey, but the Establishment survey that includes increasingly vital export and import prices. Unlike Census reports, these surveys aren’t mandatory, and businesses have way too much going on to provide timely and sufficient responses. Technically, the BLS uses donor cell and regional/hierarchical interpolation to fill in data gaps which may mute variations in price data.

For bankers responsible for credit portfolio management, charting a prudent course through unprecedented noise can significantly impede the ability to effectively manage risk. Indeed, there are both financial and opportunity costs associated with being overly reactionary and hurriedly shifting exposures within a portfolio. As we illustrate below, it’s all a matter of identifying and prioritizing the key risks that are important to your organization.

The path forward needn’t be serpentine…

One can merely muddle through or proactively develop a systematic infrastructure building upon your bank’s own existing risk management capabilities. As such, a major theme of this project is to propose a stepwise algorithm designed to cut through the seemingly endless stream of “information” that needs to be filtered, prioritized and processed into both actionable plans and flexible contingencies. In fact, this process was summarized at IBISWorld’s virtual banking client roundtable this past March.

Our hope is to assist commercial banking policymakers seeking safe and sound lending by centering on risk management (identifying, quantifying, monitoring, and mitigating risk) while discovering solid lending opportunities at a time of considerable uncertainty. Several IBISWorld risk management tools will be employed in this endeavor.

Much like the tools IBISWorld developed during the pandemic and our special study on supply chain risks, the situation begs for a commonsense procedure identifying mounting risks associated with specific lines of business, consistent with the fundamentals of Enterprise Risk Management. We advocate a mixed approach to ERM that leans more heavily on judgment and experience while still leveraging models and/or existing risk management frameworks as tools for refining grading systems, running sensitivity tests (scenarios), and building obligor scorecards.

At the center of the process are IBISWorld’s NAICS mapping tables. These concordances, or crosswalks, are embedded in many of our portfolio management databases and tools, and they include all the 700 NAICS-based industries covered by IBISWorld.

As we’ll see later, these mappings, serving as the epicenter of a relational database, will prove invaluable for integrating IBISWorld’s Key Risk Indicators (KRIs), with a bank’s Key Performance Indictors (KPIs). The result empowers the user to establish clear priorities based on underlying loan exposures.

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To see the full report, visit IBIS World, “Tariffs, Supply Chain Stress, Debt and Capricious Policies: A Systematic Approach to Credit Risk Management in a Cacophonous World.”