Jeff Judy

Jeff's Thoughts - January 6, 2010

New Year's Resolutions

This is the time of year when we consider what we might do differently, to our benefit, in the coming year. Individually, we think about eating better, exercising more, giving up vices and embracing virtues.

Most of the changes we contemplate fall within the notion of "lifestyle change." For instance, we aren't saying that we'll just think about how many calories we are packing into tonight's meal. We are trying to adjust our standards, and our habits, so that our whole pattern of eating is healthier.

The drive to manage lifestyle has grown in the past few decades because research in the fields of medicine and health shows that broad behaviors like smoking and overeating create significant health risks. People who focus only on, say, avoiding the flu, while smoking two packs a day, are probably not playing the odds very well. And it is important to remember that we can't always avoid disease, but we can do a great deal to control our own lifestyles, and thus tip the odds in our favor as much as possible.

Maybe this is a good time for your institution to consider whether you are due for a credit style change, including how you scan the horizon for risk. If we're honest, we'll admit that many of us think of risk as something that goes with a loan, that we focus on the risk of default in each credit transaction. It's rather like just making a resolution before each meal, instead of making a longer-term decision to modify our entire approach to eating.

The truth is, of course, that loans don't default, borrowers do, and risk is something that is associated with a customer, not just with a transaction. Looking for risk beyond the specific details of an individual loan has always been a good idea, but in the aftermath of the "Great Recession," as people are calling it, a different credit style, a more comprehensive approach to identifying risk and responding to it, may be crucial to good health.

Recovery is not a uniform event. Some types of businesses, some industries, will move forward more quickly than others. That means that a key first resolution might be to examine your portfolio (and develop a schedule for more frequent review) to see whether you have an overload of likely winners or losers on the books.

Another resolution, especially in the environment we are likely to face for the coming decade, is to recognize that risk management is the job of the bank, not just the banker. I have already written about the changes in legal risk, but when you think about issues like lender liability, documentation and systems requirements, and the impact of the misbehavior of some financial institutions on all of our reputations -- and make no mistake, no matter how clean your own record is, your customers, the public, and the media view you with suspicion right now -- you will want to evaluate and adjust habits of employees in every corner of your institution.

Add to that the regulatory changes, both formal and informal, that come of out the recession, and things like demographic shifts that were already in play, and you have a much broader perspective on risk than you get from thinking only at the level of the individual loan.

The next decade will test your ability to anticipate risk and respond quickly and appropriately. Many in our industry like to hide behind comforting ratios, thresholds, and rules. But the days when those are enough to protect you are gone, perhaps forever.

Resolve to develop a more open, adaptable, proactive, and creative approach to what you call risk, and where you look for it, and you may just develop a credit style that saves your financial life.