The Other Shoe to Drop
I live in Nashville, an eternally optimistic place where musicians come to get discovered, party buses line the downtown thoroughfares, and bachelorette parties toast a future of wedded bliss.
But of course, the rest of the world isn’t like that. Much of the country is coming to grips with a continuing pandemic, reduced government stimulus, rising inflation and dwindling consumer confidence. For banks, getting a handle on the impact of the real world on the loan portfolio will be critical in the months ahead. By most accounts, credit quality remains good. But banks should take a hard look at the sources of pain in their loan portfolios.
Peter Weinstock, an attorney at Hunton Andrews Kurth said at a recent Bank Director conference that regulators are asking questions about industries that may have been harmed by, or influenced by, the pandemic. Those include strip malls, retail businesses and offices. Weinstock knows what he’s talking about. He’s been through five banking crises, and they follow a familiar pattern. First there’s the emergency response. Then, there are questions about how banks monitor loans and credit quality.
The board has responsibility for ensuring the bank has a sound credit risk review function in place. Bank regulators expect the board, or a committee of the board, to review at least annually the bank’s written credit risk review policy, according to the “Interagency Guidance on Credit Risk Review Systems” that was updated in May 2020.
At Bank Director’s upcoming Bank Audit & Risk Committees Conference in Chicago on Oct. 25 to 27, my colleague and our editor-at-large, Jack Milligan, will address these issues and more in a session called “Waiting for the Other Shoe to Drop.” He’ll be joined by senior bank officers grappling with the current credit environment, such as Chief Risk Officer Scott Trapani of $27 billion Bank OZK in Little Rock, Arkansas, and Paul Ward, senior vice president and chief risk officer of $15 billion Community Bank System in DeWitt, New York.
Many banks’ borrowers are doing quite well. The other shoe hasn’t dropped. At least not yet.
• Naomi Snyder, editor in chief at Bank Director