As risk consultants, with people that have lived through numerous previous recessions, we recognise the cyclical nature of the economy and the need to be prepared for whatever is thrown at us. We have been warning about the cost-of-living crisis, increasing debt to income ratios, payments shock for borrowers leaving fixed rate loans, increasing arrears and repossessions and the return of lender losses for a while now. It’s not us being ‘doom and gloom’ merchants – it’s us being realists.
Not surprisingly these topics, and discussions around managing risks in loan portfolios are now dominating our regular chats with lenders, funders and investors.
While the global financial crash [‘GFC’] remains fresh in many of our minds, it was 15 years ago and our industry has seen massive growth since then, with lenders, existing and new, recruiting new staff, many who have never experienced a market like this. A good number of our colleagues have managed loan portfolios through several recessions, and while this may not appear be a badge of honour, those experiences do put us in a good place to help firms now. Utilising a combination of strategies and practices, we can help to minimise potential losses and ensure the overall health of loan portfolios.
Of course, there are many aspects and tactics to managing risks in a loan portfolio and not all activities are appropriate to all lenders. The original underwriting and credit assessment contributes most significantly to portfolio performance. But holders of assets need to conduct regular and appropriate stress testing and adopt a regular programme of monitoring and surveillance at individual loan level. Stress tests are more complex than they were 15 years ago, and it’s no longer good enough to simply consider property value and loan affordability forecasting.
Robust stress tests need to consider emerging risks such as the effects of climate change (physical and transitional) and consumer behavioural modelling. It is only by understanding potential worst-case scenarios, that pre-emptive measures to mitigate risk can be adopted. When things do go wrong, the oversight of third-party suppliers like asset managers, is key to minimising the risk of losses.
The fundamental basis of managing a loan portfolio in a downturn is identifying and adopting appropriate tools for individual lenders and getting the right balance between stress testing, risk monitoring and oversight.
Our work, tailored to each specific client, ensures high levels of client satisfaction. Get in touch to learn how our risk consultancy services can help your firm better understand emerging risks within loan portfolios.