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.

Despite the current economic environment, many companies still have healthy balance sheets and cash reserves to manage.  Corporate investment policies are something that come up from time to time among Board members, owners, firm partners, and financial departments of a wide range of companies.  But who’s really thinking about them?

It appears that not many professionals are.  At an event held by the Financial Management Association of NH on Monday, November 10th, less than a handful of financial professionals - out of a crowd of 100+ attendees - acknowledged implementing or being aware of any such policy within their organizations.  That so few of us were up to speed on the topic was a shocking realization to me.   Certainly the executives on hand are responsible leaders at the helms of successful organizations, therefore it stands to reason that such a fundamental step is more commonly deprioritized than it is taken to heart.  Here’s a primer on investment policies, courtesy of Morningstar.

Paul Miller of Axial Financial Group, who served on Monday’s panel along with Al Romero, SVP Business Banking at Bank of America and Matt Finn, VP Finance & Operations at Bradford Networks, highlighted two case studies that underscore the importance of using an investment policy.  One of the case studies  focused on a publicly-traded company that developed an investment policy stating that the “primary objective is preservation of capital and liquidity.”  This policy, which had been vetted by the management team and Board, was credited by that company’s CFO with helping them through the volatility of the past year and keeping them out of investment options such as auction rate securities.  Because of their policy, the company knew to immediately forego any goals of high yield in favor of keeping their cash in the safest vehicles available, and as a result were able to maintain the liquidity they needed.

An investment policy need not be overly complex, but I believe it is a fundamental building block for growing organizations, whether public or private.  And if the current economic climate does not convince us of that, perhaps nothing will!

The volatility on Wall Street last week was another in a long line of events that is making for an historically unstable economic environment. However, in our line of work we see a lot of the activity on the front lines, and we want to emphasize that there is still business to win and still growth to attain. Despite a climate that is financially questionable relative to recent years, the capitalist nature of the country offers opportunities for businesses to thrive – even in anxious times.

Our latest audiocast is on this very subject, and I encourage you to give a listen below or download the mp3. Feel free to drop us a comment or an email if you have any questions…as always, we’re happy to engage in a discussion about what’s happening across the business landscape.