The industry must address problem loans quickly, but also continue lending to creditworthy customers. Shareholder value and regulatory response depend on it.
Philadelphia, Pa (February 26, 2001) - In recent letter to the membership of RMA--The Risk Management Association, RMA President and CEO Al Sanborn advised bankers to be attuned to increasing risks and problems, but also to continue lending to creditworthy customers. He also said it is important for the industry to work closely with its respective regulators.
"Problem loans are clearly on the rise and will continue upward throughout this year," says Sanborn in the upcoming issue of the professional association's monthly publication, The RMA Journal. "As a result, the industry and its regulators face a delicate balancing act on the credit front. It is important to address problem credits early. But it is also important for your bank and the overall economy to continue financing good creditworthy customers."
In September, Sanborn warned that a cold winter and a sharp drop in the stock market could have a very negative impact on the economy. "As risk managers and bankers, we need to ensure that we are prepared to handle a more challenging environment," he told RMA members at the time.
Clearly, the higher energy costs and dips in the stock market have affected the economy and consumer confidence. A number of major companies are missing earnings targets, beginning restructuring programs, and showing signs of real trouble. Well known firms such as Bradlees, Montgomery Ward, LTV, Converse and Vlasic have declared bankruptcy. Defaults are also rising appreciably.
"The environment has changed markedly over the past six months," says Sanborn in the letter. "Moreover, the impact of the slowdown is perhaps more pronounced due to the exceptionally strong performance of the economy over the past few years. Many business plans were developed under the assumption that a strong economy could continue indefinitely." The new paradigm that economic cycles no longer existed, discussed 12 months ago, proved to be false.
During difficult economic times, it is especially important that financial institutions maintain strong communication with their regulators. In a recent interview with American Banker, Sanborn said that the regulators "so far, have been pretty balanced." He also noted that bankers have much better risk processes today than they did a decade ago. Bankers also have strong capital positions and better earnings. And, unlike in the last downturn, there is not a "huge concentration" in commercial real estate.
"The length of the expansion itself may produce its own set of problems," Sanborn told RMA members. "Memories of tough times have faded. Many bankers today have not worked through a credit cycle. It is for this reason that it so important for the industry and its regulators to work together closely."
RMA communicates often with industry regulators, meeting with them quarterly in Washington. Noting the increase in problem loans, Sanborn said bankers need to recognize challenges. "We need to be certain that we are taking the actions that are necessary on behalf of our shareholders so that our relationship with the regulators remains constructive."
Click on the following links to read the full text of Sanborn's letter and the American Banker article.
RMA is the only financial services association that specializes in promoting effective credit risk management practices across the entire financial services industry. Its membership consists of more than 3,000 financial service providers. These institutions are represented in the association by more than 18,000 commercial loan, credit, and risk management professionals in 50 states, Puerto Rico, Canada and numerous foreign cities, including Hong Kong, Singapore and London. For more information, e-mail or call Pam Martin, Director of Regulatory Relations and Communications, at 215-446-4092.