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The extraordinary events over the last few weeks related to the unfolding pandemic and the responses to it are having profound effects across all aspects of people’s lives and the economy. Consumer and Small Business lenders face challenges in how to balance their customers’ needs and hardships with the safety and soundness of their institutions. What good is credit policy based on data from times where entire industries weren't shut down and where Americans weren't confined to their homes for an indeterminate amount of time?
Discontinuity creates challenges
Today’s situation represents a discontinuity that renders past performance data, and even current credit attributes, mostly useless. 12 years ago, key credit signals, such as the value of being a homeowner, reversed rapidly resulting in the need for lenders to revamp their models and policies. Now the discontinuity is even more far-reaching, and the change is happening even more quickly. Inbound application mix, line usage patterns, and payment behavior will all change and change very quickly. Failure to respond immediately will likely lead to adverse selection and the booking of poor-performing assets that could drag down a portfolio for years to come.
So, where can lenders start?
The lack of reliable data means that policies and programs will need to be revamped based heavily on expert judgment. Lenders should develop different scenarios for how the environment will evolve, both in the nature, depth, and duration of the recession we are almost certainly about to face. Using those scenarios can guide institutions on how to identify new, more real time, credit signals that are more indicative of prolonged risk.
Bold, immediate action is essential. Acknowledging that current credit policies and programs are no longer relevant is the first step. At AQN, our leadership team has deep credit experience across multiple recessions. We are currently helping many of our clients make critical decisions, leveraging our experience, perspective, and current market insights. Please do not hesitate to reach out if we can be of assistance.