Credit risk is rising. Borrowers are defaulting. Banks are failing. And, to make matters worse, regulatory scrutiny is intensifying.
Unfortunately, today’s rigid and unreliable legacy lending ecosystem can’t help. If decision making remains slow and based on incomplete information, banks’ reputations will crater, or worse. Maintaining portfolio health has never been more daunting ― or critical.
Relentless market forces
Rising interest rates
Because rising rates can simultaneously increase the cost of liabilities and decrease the value of investment securities held as assets, interest rate hikes have negatively impacted some banking investment portfolios. This, in turn, has led to funding challenges, earnings pressures and issues with capital, since even paper losses can have harmful effects on liquidity.
The ongoing acceleration of interest rates has forced a growing number of prospective home buyers out of the market, with mortgage demand declining to a 28-year low in March. Between March 2021 and January 2023, total mortgage originations plummeted by 83%, according to Black Knight. While government agencies like Fannie Mae and Freddie Mac are willing to buy riskier mortgages, many lenders are not inclined to originate them.
Flight to safety
The March failure of Silicon Valley Bank (SVB) took a profound toll on the banking industry. The collapse triggered a broad move by consumers to shift deposits to bigger ― presumably safer ― banks. On the heels of SVB’s disintegration, several additional small- to mid-size U.S. banks collapsed ― sparking a sharp decline in global bank stock prices and swift response by regulators in an attempt to thwart a domino effect from cascading across the entire banking sector.
Aggressive regulatory change
Lenders are feeling angst over new rules on the horizon, such as modernized CRA regulations and Dodd Frank Section 1071 Small Business Reporting regulations. Additionally, in March President Biden called on financial regulators to toughen oversight of medium-size banks, which seeks to revive some of the requirements included in the 2010 Dodd-Frank law.
Internal deficiencies heighten compliance risk
Compounding the many disruptive market conditions faced by today’s lending organizations are a variety of internal struggles, most notably around efforts to manage compliance risk.