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By Peter Cherpack – Executive Vice President of Credit Risk Technology and Partner, Ardmore Banking Advisors

As we approach Q4 of 2025, bankers should consider some of the significant trends in credit risk management and think about what practices and resources are needed to successfully manage emerging risk in 2026. What follows is a brief overview of trends in a few key areas:

External Credit Risk Environment

2025 was marked with some major carry-over concerns from 2024 including CRE concentrations (Office and Retail in particular) and interest rate risk from maturing lower interest rate loans. Concern over those issues continues as we move into 2026, though the likelihood of a significant CRE bubble burst has lessened. And, while there are still pockets of risk in CRE, these seem to be localized issues. Concerns over high interest rates persist, although the recent decrease – and insinuations of further adjustment – could help to alleviate those. Good early communication with borrowers and proactive relationship management by banks seem to be containing the overall level of risk.

On the other hand, new uncertainties in the economy due to the unknown impact of the implementation of tariffs will likely continue into 2026. According to an August 7th article in the American Banker, “Tariffs can cause financial firms to scale back certain activities. A 2023 paper by researchers at the New York Federal Reserve found that banks respond to such trade measures by pulling back from riskier business loans and shifting into safer investments. This reduction in lending can, in turn, slow the broader economy.”

Banks are encouraged to stress test their portfolios to anticipate tariff impact on higher risk industries and import/export reliant borrowers. The OCC has specifically suggested using multi-model stress testing to help assess credit risk in this area.

Regulators Doing More With Less

In 2025, a clear trend within the prudential agencies was to look more closely at a financial institution’s risk management processes and practices to help examiners assess if a more in-depth examination is justified. Layoffs in the agencies, coupled with a clear message from Washington to pump the brakes on regulation, have created a need for regulators to adapt their approach. Based on feedback we have gathered from our clients and at industry events and seminars hosted by ProSight (RMA) and others, the bank’s loan or credit review departments are impacted by such shift. Typically, asset quality and loan review targeted exams have focused on thorough analysis of underwriting and risk rating of a significant portion of the bank’s loan book.

Starting in 2025, it appears that examiners from the OCC and the Fed specifically, are spending more time reviewing and assessing loan review departments’ (or their third-party providers) processes and practices in detail. It seems that if the examiners feel that the bank’s loan review processes and controls are adequate, they are less concerned with deep dives into the portfolio on asset quality.

Loan Review best practices include clear documentation of all processes, “showing your work” on your workpaper/line sheets and a clear and concise summary of Loan Review’s rationale for approving or disagreeing with the risk rating from the line. Some also believe that the use of an expert third-party provider of loan review services for a specific segment of the portfolio is another way to prove to the regulators that the bank is proactive, as another set of eyes looking at credit risk can bring another valued perspective to the bank’s risk managers.

Increased Importance of Timely Annual Borrower Reviews

While annual borrower reviews have always been an important piece of the credit portfolio management puzzle, missing annual borrower reviews can be a “Red Flag” to examiners, symptomatic of larger systemic issues, due to the new regulatory focus on “process”. The annual borrower review does not have to be an exhaustive, re-underwriting of all loans, but it should give examiners evidence that relationships that represent potential risk to the bank are being monitored appropriately.

Like the regulators, bankers are also trying to do more with less, so sometimes annual borrower reviews are left until the end of the year, and do not get completed. It is recommended to enforce a cycle of annual borrower reviews earlier in the year, and to have Loan Review cite administrative exceptions if they are not current in the loan files. If necessary, using third-party support for completing the annual borrower reviews can help, but there has to be enough time remaining to complete them for the cycle. There is no reason to give regulators a reason – like stale financials and missing annual borrower reviews –to dig deeper in these challenging times.

Artificial Intelligence Usage Lagging in Most Banks

In August 2025, the American Banker released the results of its “Chasing the potential of intelligent automation report” with 153 banks and credit unions (CU’s) responding. While the use of AI for fraud detection continues to be a success story, according to the report, more than 50% of regional bankers and credit union executives stated that privacy concerns were the primary showstoppers for AI implementation.

While a concern for all banks – community banks in particular pointed to “company culture” as a primary challenge to AI adoption in 2025. The need to get an institution’s data cleansed and structured so AI utilities can use it effectively is also cited as a major concern and roadblock to progress. Unfortunately, most bankers (57%) reported that they didn’t have the expertise in-house to develop and support AI models and projects, and 52% also indicated that AI training was in need as well.

The study called out a clear correlation between the size of the financial institution and relative sophistication of their IT architecture as a major determinant of the number and scale of AI projects. This suggests that community bankers and mid/smaller CU’s are going to be slow AI followers and will be waiting to see how things shake out at larger organizations in 2026. For now, fraud, compliance and customer service are areas most likely to grow adoption in the coming year. While some larger institutions are trying to model risk management applications, and even credit decisioning using their own data with AI tools, these are outliers for the near term until privacy and cultural issues are tackled.

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