By now, it's pretty much accepted that some sort of an economic downturn is coming over the next 24 months.
Last month we outlined several steps you can take to prepare.
Click on this link to view our January Newsletter.
Starting this month, we will discuss these steps in more detail.
Let's suppose you are out for a drive and the posted speed limit is 55 miles per hour (mph). If you decide to go 75 mph, one can reason that you are taking more risk. If the speed limit is 55 mph, and because of current conditions, you decide to slow down and go at 45 mph, then it can be concluded that you are taking less risk. This same thought process can be applied to your loan portfolio. You need to know how fast you are going and what is a safe speed limit. In order to monitor and control credit risk, you have to measure and quantify it, and then set a safe risk tolerance limit (speed limit).
One of the best ways to do this is by using the Weighted Average Risk Rating (WARR). Calculating the WARR is simple, and takes into consideration both the size and risk rating of the loan. You can use it to monitor risk by loan types (i.e., CREM, C&I, Construction, etc.), industry groups, loans originated in different years, loan officers, and geographically. The WARR is one of the most useful tools in identifying, measuring, monitoring, and controlling your credit risk. See our full article on Page 10 of the attached
Banking New York
magazine for more on this subject.
Stay proactive and be well prepared for the next economic downturn. If you would like to discuss further on how to use the WARR to control your credit risk, don't hesitate to