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Portfolio Risk & CECL Loan Review and Due Diligence

Two credit risk takeaways from recent headlines

Kent Kirby
October 20, 2025
Read Time: 0 min
two people reviewing financials on a tablet

"The sky is falling!!" What credit risk managers should do

Financial institutions don't need to panic in the wake of recent headlines about credit risk. Instead, review credit risk ratings and strengthen loan review to ensure sound risk management. 

A modern "Chicken Little" moment

When I was a kid, one of the stories that stuck with me was Chicken Little. After being hit on the head by an acorn, Chicken Little panics, shouting, “The sky is falling!” As he runs to warn others, each animal he meets joins in the chorus – until the whole group runs across a fox who offers his den for protection, which they gladly accept. The next morning, the only one left is a very full fox. (This is the traditional folk tale version, mind you, not the Disney animated film.)

The moral is clear: don’t jump to conclusions or spread panic based on incomplete information.

 

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I recently read articles in both the Financial Times and the Wall Street Journal that sounded a lot like Chicken Little’s cries – this time about the U.S. banking system. The focus? Two isolated fraud cases at Western Alliance and Zions. CNBC even ran the headline: “This is not another Silicon Valley Bank: Traders bet these loan issues are not systemic.”

Really?

While it is understandable that there is concern over the cases of alleged large-dollar fraud (in the neighborhood of $140 million), the fact remains that these are loans made by two banks to the same borrower group that—at a full loss—represent less than 2% of capital for either bank. These are isolated situations, not systemic failures.

But in the words often attributed to Winston Churchill, “Never let a good crisis go to waste.” So instead of wringing our hands, what can financial institutions learn from this moment? I see two opportunities.

1. Rethink credit risk ratings

Most credit risk rating frameworks include a qualitative factor for the borrower’s “management.” Too often, the description of this factor is a vague label like “strong,” “adequate,” or “weak.” Let’s be honest – if management is “weak,” that’s not a rating. That’s a reason to say no.

A better approach is to evaluate governance rather than personality:

  • Is it a one-person operation or a team with independent oversight?
  • Are internal controls modern and robust, or is a single person still running the books using ledger paper or Excel files?
  • Are responsibilities and authorizations properly segregated to prevent fraud?

The same scrutiny should apply to how the institution governs its own transactions with borrowers:

  • Are multiple lenders involved in similar lending types?
  • Is there an intercreditor agreement in place?
  • Are collateral rights clearly defined in a default scenario?

Weak governance increases inherent risk and should be reflected in the risk rating. Institutions that adjust either governance factor downward as overall risk rises will get a truer picture of exposure.

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2. Strengthen loan review

In my decades of experience in all aspects of commercial banking, fraud usually falls into two categories:

1. Bad actors from the start, or
2. Good people who make bad choices under stress.

The first tends to surface quickly; the second evolves as conditions deteriorate. An institution’s loan review group won’t always catch fraud directly, but it can and should highlight warning signs.

Some areas to focus on:

  • Borrower governance: As covered above.
    Institutional governance: Repeated issues within specific lending segments (like construction or asset-based lending) may point to deeper problems.
  • Financial analysis: Watch for inconsistent cutoff dates, unexplained intercompany transactions, unrealistic projections, and “too-good-to-be-true” turnarounds.
  • Loan activity: Review utilization trends on lines of credit over 12–36 months. Investigate sudden changes. Run UCC-11 searches for overlapping collateral filings—especially on inventory. Even if it’s not fraud, multiple claims can cause liquidation chaos.

Loan review’s job isn’t to fix these issues, but it is responsible for identifying them and adjusting risk ratings accordingly. (That’s why “Special Mention” exists, after all.)

 

Noise doesn’t equal crisis

The lesson from Chicken Little still applies: don’t confuse noise for crisis. Sensational headlines may grab attention, but sound risk management depends on analysis, governance, and discipline – not panic.

Abrigo helps financial institutions stay grounded in data, governance, and sound analysis rather than headlines. We also have loan review solutions that help credit risk management professionals do their jobs more efficiently so they have more time for deep analysis. Reach out to our Advisory Services team to learn more, or visit Abrigo.com to explore solutions that help financial institutions manage risk and drive growth.

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About the Author

Kent Kirby

Senior Consultant, Portfolio Risk
Kent Kirby is a retired banker with over 39 years of experience in all aspects of commercial banking: lending, loan review, back-room operations, credit administration, portfolio management and analytics and credit policy.  As Senior Consultant in the Portfolio Risk practice, Kirby assists institutions in the review and enhancement of commercial

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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