Jeff Judy

Jeff's Thoughts - April 18, 2018

Good Times, Bad Loans

At one of my recent speaking events, I got into a conversation with a credit manager I've known for some time about possible negative impacts of the strong economy. He was mentioning how the current business conditions are a "tide that raises all boats," as the saying goes. He summed up his concern very simply: "good times, bad loans," he said.

We both agreed that in these conditions, most businesses show decent financials. If all you think about are the numbers, if a credit decision is just a question of scores and ratios, it becomes easy to approve credits to businesses that are in reality fairly vulnerable to any changes in those conditions.

Some changes are gradual, but still have an impact. We're definitely looking at rising interest rates for the foreseeable future. But how many of the front-line credit staff who are working with, and analyzing, our borrowers today have actually worked in an environment of rising rates? Do these staff understand how to project the impact of rising rates on the businesses they work with?

Nor have they worked with a full employment economy. Do they understand how a shortage of appropriately skilled labor can hamper a business's growth?

Changes can be abrupt, even in a good economy. It looks like we may be headed for a major trade war, and that will affect different industries in different ways. Are your staff preparing new projections that factor in possible tariff impacts on the supplies needed to do business?

And some businesses are experiencing dramatic changes in management personnel as a result of the recent heightened awareness of sexual harassment. Are staff monitoring the management teams in their borrowers well enough to pick up on important changes in personnel, whatever the cause?

Remember that even though there were warning voices crying in the wilderness before the Great Recession hit, it seemed to reach full impact very quickly. There was not much time for businesses, or for their creditors, to react. The borrowers who had sound fundamentals in the good times -- not just good numbers driven by a booming economy -- were the ones who survived, and who, more importantly, had the cash to repay their credits.

After all, it is human nature not to go looking for problems. But that's precisely what we need to do, and now is precisely when we need to do it. We need to be looking for vulnerabilities to future shocks among our borrowers.

If we find those vulnerabilities now, we have a wider range of options for dealing with them. For some borrowers, we can step up monitoring to get ahead of problems. For others, we can advise them about ways to strengthen their positions. For still others, we can renegotiate structure, or even subtly encourage them to move to a competitor and become someone else's problem in the next downturn.

Wise leadership prepares for the future, whether that's the leadership of your borrower or the leadership of your own institution. And given how good our present is, at some point the future must be worse. Prepare for it.