3 External Challenges Banks and Credit Unions are Facing Today
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.