In the wake of the highly publicized stress tests on U.S. banks, there is no shortage of commentary on concerns about credit and the environment in which banks and borrowers are operating today.
Banks are in a tenuous position as they balance their role – to provide and protect capital – with the risk of performing that very function. We’re finding that the process of credit risk examination is evolving in front of our eyes, as lenders are putting a high priority on catching warning signs of default early on. By improving the quality and interpretation of information used to determine risk, they are changing the way they approach due diligence on loans.
Lenders’ motivation is clear: even in this difficult economy, they eventually have to find a way to be comfortable lending. Yet loan delinquencies are higher than ever, as Reuters points out in this April story, “National Consumer Loan Delinquencies Highest on Record.” The American Bankers Association notes in the article that “the fourth-quarter [delinquency] rate was the highest since it began tracking the data in 1974, with delinquencies rising in nearly every category. It said these credit trends are unlikely to improve before 2010.”
Banks have in effect woken up to the fact that the financial storm is well upon them and a greater focus on due diligence is necessary. That doesn’t mean “not lending,” it means “smart lending,” and we are encouraged to see a renewed focus on extracting and interpreting information that flags symptomatic default issues early on.