3 External Challenges Banks and Credit Unions are Facing Today

Sageworks
February 23, 2016
Read Time: min

Financial institutions face a range of challenges arising from issues that are external to the bank or credit union, including:

  • Interest rate environment
  • Changing regulatory and accounting landscape
  • Competitive pressures, especially for commercial and industrial (C&I or MBL) loans.

After several years of trying to mitigate the impact of low interest rates on net interest margins, financial institutions are determining how rising rates will impact growth strategy and profitability. They are evaluating loan portfolio strategies and stress-testing efforts related to capital requirements, particularly as they try to keep up with the changing regulatory and accounting landscape.

Basel III, the Financial Accounting Standard Board’s proposed current expected credit loss (CECL) model, or CECL, and the regulatory bodies’ focus on understanding risk and ensuring sufficient capital to cover those risks have provided community banks, especially, with new challenges. They have also provided banks with increased scrutiny of processes and controls by external auditors and examiners.

Many bankers worry that moves toward standardized products and a “one-size-fits-all” supervisory approach may take away one of the strongest advantages of community banks:  the ability to tailor products to fit individualized needs. This feeds into fears that increasing competition from a consolidating market will leave some customers viewing “too big to fail” banks as being safer than smaller institutions. At the same time, merger and acquisition activity reminds community banks that without growth and the ability to invest in technology, they must avoid being “too small to survive.”

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“Shrinking net interest margins, increased requirements for reserves and capital adequacy add to the pressures community banks face to scale in and to remain competitive,” Brown says. These competitive pressures are evident in commercial and industrial lending trends, which have prompted warnings by regulators about growing credit risk.

About the Author

Sageworks

Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest real-time database of private-company financial information in the United States. The company was acquired in 2018 and is now part of Abrigo.

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Abrigo is a leading technology provider of compliance, credit risk, and lending solutions that community financial institutions use to manage risk and drive growth. Our software automates key processes — from anti-money laundering to fraud detection to lending solutions — empowering our customers by addressing their Enterprise Risk Management needs.

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