Fed’s Concerned Over Risk in Lending

/Fed’s Concerned Over Risk in Lending

Fed’s Concerned Over Risk in Lending

WSJ 6/13/13 – U.S. regulators are grilling banks over lending standards and warning them about mounting risks in business loans…. But regulators worry that banks have sweetened loan terms too much, which could put them in jeopardy if corporate borrowers can’t repay. In private meetings with bankers in recent months, regulators from the OCC, FDIC, and the FRB  focused heavily on commercial lending. Regulators are concerned with leveraged loans and they question whether some banks are doing enough to gauge risk in March. In April large banks told the Fed they had relaxed a variety of lending standards in the first quarter. At the same time the country needs lending to stimulate the economy.

All this oversight puts pressure on a Bank’s resources human and otherwise. No lender, I know, wants to book a loan that is going to turn sour as it can be a CEO, career ending opportunity.

The government is concerned with not repeating the recession we just excited. What is confusing to me is that the recession we just excited was mortgage / real estate driven not commercial lending driven.

This begs the question, what is concerning the feds. Is it corporate lending or is it the economy?

A month or so ago we wrote about the Fed’s concern over corporate borrowers ability to meet loan payments when rates increase.  So the song continues and what are the right notes to hit.

What follows are thoughts / procedures you may wish to consider as additional controls for your file and peace of mind.

Strong outside Board of Directors

Strong outside Boards help in a number of ways from adding expertise to reviewing the CEO. In our most successful case it was the strong outside Board that first had concerns before contacting CRL. Provide your customer with valuable input and suggest the development of strong outside boards.

Strong Control systems

Any strong control environment starts with ethics, CEO and CFO. A strong CFO is essential and they must be allowed to do their job. More importantly the CEO must allow the CFO to do his job. The CEO should not interfere by putting undo pressure on the CFO to meet those projections and the CEO’s bonus. You may wish to have an independent assessment of the management team in your file or at least your own internal review.

Good numbers are critical.  Failure to see the warning signs can lead to bank losses.

Planning – both short and long-term

Your file has a number of spreadsheets containing your customer’s plans, but what do they mean and is the company meeting those projections. A critical control function would include a quarterly review of the pro-forma to actual results. These pro-forma financials should include detailed cash flows and an analysis of working capital components.

If your customer is having difficulty meeting those original projections but assuring you everything is under control it may really mean the opposite.

    • The more your client is sliding away from those projections the more detailed the projections need to be. We have seen far too many cases where losses are concealed via inventory and other accounting shenanigans.
    • Engaging a true professional to drill down through those projections to provide an independent assessment is another great control function for your file.

Lastly, the file should contain appropriate sensitivity analysis done by the client or an independent third party professional that provide clear evidence that you the banker have done everything possible to meet the feds concerns and yours.

By | 2017-03-06T12:04:52-04:00 August 15th, 2013|business advisory|0 Comments

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