08 Jun Invictus Bank Insights – June 2020
The financial fallout from the coronavirus is not going away anytime soon. Now that the all-hands-on-deck efforts to secure federal Paycheck Protection Program loans has passed, community bank executives need to get a sense of how their banks will handle the rocky road ahead.
The coronavirus chaos and its cascading impact on the financial markets has obliterated the existing strategic plan for every community bank virtually overnight. Bank CEOs must now shift gears and focus on getting ready for a broader economic downturn that is increasing with probability by the day. Big strategic initiatives will likely be put on hold until operational challenges can be contained, and the economy, markets and the interest rate environments stabilize. Throw in the fact that it’s an election year, and the uncertainty multiplies.
The economic fallout from the coronavirus is keeping many community bank executives awake at night. But some bankers are getting extra sleep, thanks to a tool that helps them understand their risks in real time, while also seeing the capital impact of any strategic moves they might make.
Community banks can no longer estimate their loan loss reserves the way they did before the coronavirus upended the global economy.
Think back to January. Your bank had finished another great year, and you had to calculate your ALLL for year-end financial reports. You had a model, but the results of the model simply weren’t large enough. Even if you are an SEC-filer getting ready to comply with CECL, you discovered that CECL didn’t really solve this “problem.” The losses just weren’t there.
Many community banks have been in touch with their borrowers to assess their financial condition during this precarious economic environment. Bankers are also segmenting their portfolios based on some of the most affected industries, including restaurants, hotels, retail, manufacturing, and others.
The one thing we know about the future economic impact of COVID-19 is that we do not know what it will be. The internal optimist in all of us hopes that the lockdowns start to unwind, the economy quickly returns to business as usual, and loan losses are modest because the modifications and Paycheck Protection Program (PPP) loans worked.
After the 2008 Great Recession and prior to the coronavirus pandemic, regulators turned to stress testing to establish bank capital adequacy levels. The Federal Reserve established a program called the Comprehensive Capital Analysis and Review (CCAR) for the largest banks, laying out economic scenarios and parameters for each stress test.
Invictus has been inundated with queries from banks about our pandemic stress testing services. Here are some of the top questions we’ve received.
1. Why can’t my bank use the stress tests we already have?
The coronavirus has presented the first threat to community banks since the 2008 financial crisis. For the first time, stress testing is a real exercise. What community banks across the country are discovering with dread right now is that their regulator-approved models are useless for the pandemic environment. Community banks need to quickly recognize that stress testing is no longer about satisfying regulators and immediately arm themselves with the right tools to prepare for a severe downturn.