Abrigo Poll: Bankers Expecting a Recession for at Least 2 Quarters; Troubled Loans and Liquidity Top List of Concerns

Kylee Wooten
March 27, 2020
Read Time: min

Although it’s still early, bankers have started to make their own assumptions about the impact the coronavirus pandemic will have on the economy and their institutions. In fact, three out of four bankers expect a recession will last at least two quarters.

In an informal poll during the webinar, Optimizing CECL: Moving from No Losses to an Integrated Risk Profile, attendees were asked how long they expect a potential recession to last. Nearly three out of four attendees expect that a recession could last two quarters or more (74%). The poll also highlighted the uncertainty of the situation, with almost a quarter of attendees responding that they were unsure (24%).

These results show that bankers are expecting the crisis to be slower emerging, and the systemic effects will be a bit longer, Garver Moore, Managing Director of Advisory Services at Abrigo, explained during the webinar. “The sooner we can decrease the uncertainty, the sooner we can all move on and manage what happened,” Moore said.

Economic uncertainty has also shifted the questions financial institutions have in regard to estimating the allowance for credit losses under the current expected credit loss model, or CECL.

“For any kind of CECL calculation you need to make some sort of assumption about the macroeconomic future, and once you have that assumption, you run that calculation and run your models, and you’ll get an expected loss,” said Joseph McBride, Head of CRE Finance at Trepp. “Of course, the confidence in that number may not be as high as it was two months ago, but it’s still something that every 2020 filer has to do.”

Many bankers are now asking questions like, “How will the scenario change? Will the baseline change? How do we take this into account?” McBride said. It is hard to predict the impacts and ripple effects the pandemic has caused, but institutions must make an assumption, McBride warned.

It’s quite a change from just months ago, when most questions focused on defining a reasonable and supportable forecast period and determining how to forecast losses.

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When it comes to the potential impact that the pandemic might have on financial institutions, managing troubled loans and liquidity and funding (24%) top the list of concerns for bankers, according to another poll question during the webinar. Nearly a third of attendees cited operational concerns (18%) or staffing concerns (13%) as their top worry.

“I think the operational concerns and staffing actually play into the first two concerns, especially the troubled loans process,” Moore noted. “Whether you call it a TDR or not, that’s a lot of work.”

On March 22, federal and state banking regulators offered modifications and guidance on troubled debt restructurings (TDRs). Under the changes, financial institutions will not have to automatically categorize all COVID-19-related loan modifications as TDRs, nor will they have to classify as TDRs all short-term modifications made in good faith in response to COVID-19 to borrowers who were current prior to relief.

As for staffing issues, Moore and McBride pointed to the challenge of working remotely for financial institutions. “Everyone involved is going to need to access up-to-date information. Some institutions are well-positioned for that, and others aren’t,” Moore said.

While there are still more questions than answers, lawmakers are working quickly toward providing more clarity and relief. Wednesday, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which aims to bring financial relief to businesses, financial institutions, and individuals impacted by the coronavirus. The stimulus bill could provide banks with a number of tools to aid their trepidations, as well as increase their capacity to help their customers and members.

About the Author

Kylee Wooten

Kylee Wooten is a content marketing manager at Abrigo.

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About Abrigo

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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