It is no secret that we are all trying to cope with and manage through the uncertainty due to the coronavirus and the health and economic impacts of COVID 19. The impact to financial institutions is of utmost concern to us at Abrigo, and we are committed to helping our 2500+ clients as they face uncertainty in earnings and cash flow.
The ability of financial institutions to make concessions and work to provide the markets with assurances is a direct result of their overall financial well-being, as well as their nimbleness. After the Great Recession, financial institutions retained more capital to build in buffers to face uncertain times like this. Now is the time they need them, and these buffers are being put to work. Credit underwriting has become more rigorous, helping financial institutions to better understand potential risks, which should help them find ways to work with borrowers that are facing risks in today’s environment. Technology investments of recent years are helping to seamlessly allow both workers and customers maintain relationships and business activities, even if they are a bit more challenged than when using traditional methods. In all, financial institutions are generally well prepared in the areas that they could control to deal with this “crisis”.
Now that all of the financial institutions’ planning is being called into action, it’s important to realize that the best laid plans sometimes go awry. All plans are based on two variables: things we can control, and things that we cannot control. One of the major concerns today is the unknowns that impact plans that we do not control. Let’s focus on the financial risks we don’t control and assess the risk.
During the crisis in 2009, the banking system saw shockwaves hit, causing a number of bank closures. Most of these were due to a lack of underlying liquidity. This liquidity drain was, in most cases, a direct result of increased credit risk and funding sources used to grow the banks. In short, liquidity was the final straw for many banks that failed, but in most cases, credit risk was the disease that made them sick.
Today’s situation is 180 degrees from that environment. Financial institutions today are holding higher levels of capital, and their overall credit underwriting processes were upgraded to avoid mistakes of the past. What we have now is not a series of less secure banks being hit with losses, but rather strong banks and borrowers having to adapt to a sudden change in overall economic activity. Borrowers are facing uncertainty around cash flows as factory orders slow, rents from tenants extend, and other issues that are related to their future income levels are hampered by the need to stop a nasty disease from spreading. Workers that are uncertain of their future paychecks are likely to hoard cash, use existing lines of credit to preserve funds to meet basic living needs, and hope to stay out of harm’s way. It has been repeated by so many that this is not a financial crisis like the Great Recession. While the cause is a non-financial agent, we all understand that this is in fact a financial crisis, but beyond the financial sector.
To help bankers think through the ways they might be proactive in their financial institutions to weather yet another storm, here are several things that need attention and continued monitoring. The financial institution’s internal plan should include at least the following.