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Key Takeaways from Risk Management Association’s 2023 Annual Conference

In mid-November, the Risk Management Association (RMA), presented their 2023 annual risk conference, offering hours of video on a wide range of credit and lending content. Our credit risk professionals were in attendance and have summarized what we feel were some of the key takeaways around some of the most pressing issues in the industry. We hope that you find this information pertinent and useful.

What follows are brief summaries in the indicated issues, with more detailed analysis afterward. If you’d like to jump directly to a specific topic, please click the link below.

Stress Testing in Community Banks – Stress testing the portfolio for concentrations is now a regulatory expectation for all banks. The results of the process should feed into capital planning. The current focus is on CRE concentrations – particularly office – and those loans that are repricing in the near term. Archiving and maintaining good data with integrity is an ongoing key to stress testing.

Physical Climate-Related Credit Risk – Several large banks participated in a discussion on the potential impact of climate risk on lending, with a particular focus on the acute physical risk of climate events and impact on insurance. Each Bank on the panel had its own geographic footprint which had a significant impact on their approach to managing this risk. Most large banks are partnering with third-party climate data vendors to help gather specific data about those risks. Good insurance coverage is key to successful and timely resiliency (and reconstruction) for borrowers. Banks are looking at potential credit losses against insurance coverage and reevaluating if the risk to the collateral is covered – starting by identifying potential insurance coverage gaps.

Impacts of Regulatory Thresholds – This session featured a law firm that assists larger banks in compliance issues when passing certain regulatory asset size thresholds. Most banks use acquisition to grow quickly when nearing thresholds. The presenter advised that “You don’t want to be just a $101 billion dollar bank,” since you need scale to manage new compliance expectations. This drives a lot of M & A activity. Also, more enforcement actions are being published by the regulators, as evidenced by the fact that there were more enforcement actions issued by the end of the summer of 2023 than in all of 2022. There is some concern from regulators that the Silicon Valley Bank (SVB) and Republic failures justify more oversight for banks of that size.

Being a Bank Director – This session included ex-regulators, current bank board members and a large bank Risk Manager. Much of the early discussion touched on “March Madness” (the SVB, First Republic failures this spring) and how a “lack of effective board oversight” contributed. The difficulty of trying to decipher mountains of information provided by bank management was raised, but at the same time, the panelists acknowledged that it is crucial to get good, pertinent information to use when offering constructive challenge to management. A board member described their role as “noses in, fingers out” – that you need to look into what’s going on, understand what management is doing, have lots of conversations with people, and ask questions – but not direct bank activity. Board diversity was also a major topic, since the makeup of the board has changed significantly over the years.

Rising Credit Risks Today – A panel of two large bank lenders held a wide-ranging discussion with a focus on capital markets and current economic trends. Challenging segments under current conditions were discussed including the ”consumer discretionary sector”. Consumers are less likely to buy at this point, and not proactive on investing in spending due to higher borrowing costs. There is a regulatory focus on emerging risk that emphasizes enhanced monitoring and early identification. Office has become the primary concern, but all inflation-sensitive industries should be watched closely. Refinancing risk in C & I is starting to be a concern. Climate-related credit risks and the transition to lower carbon footprint industries and practices was discussed, as an emerging risk that all banks will eventually have to grapple with.

New Challenges for Community Banks and Emerging Risks – This session included a panel of three community bank CCO’s who each opined on what they felt were worrisome emerging risks. Comments included: “The temporary economic relief structures and funding has worn out. Bankers are not used to dealing with these new issues. Add in additional taxes and growing insurance costs, the future will be tough, especially for small businesses.” Also: “Now, when deals are done we look harder at liquidity – and we need to get the operating accounts and deposits for a clearer line of sight into their cash flow”. One banker emphasized the deeper level of detail taken in their safety and soundness exam with the FDIC after “March Madness”. They were asked about deposit base, funding, concentrations, stress testing and their liquidity plan.

Community Bank Management of Concentrations – This session was centered on a discussion of concentration management best practices and processes for community bankers. A couple of the banks focused primarily on CRE concentrations – being at or over the 300% of capital threshold. CRE concentrations by CRE property types a focus. Some started their management program with the regulations, then overlaid their own policy on top of that, then discussed it with the board. They didn’t want to track too many concentrations, needing to keep it simple. They looked at correlations with losses and emphasized those concentrations. Current concentration information should be clear and widely shared and discussed within the organization, including with the board and the line.

Update from the OCC – RMA President Nancy Foster served as moderator for this discussion OCC Acting Director Michael Hsu. Commenting on OCC priorities, Hsu said that they haven’t changed a lot because banking is about trust, and we have to look at what the threats to that are. Threats include the growing non-banking sector, the impact of climate risk management and risk complacency. Also, there is the continued need for “blocking and tackling” of liquidity, credit and operational risks like Cyber. Comments on Basel, Climate and third-party risk management were also shared in this 30 minute session.

Community Bank CCO/CRO Panel – Three CCO’s were interviewed, ranging from a $500MM bank to one with just over $2B in assets. Concerns were shared about the near-term economic conditions. They believed that things have been stable for a such long time, that things will inevitable change. Bankers are comfortable now, but aware of the danger of complacency. Office, CRE Concentrations have to be looked at. Most on the panel agreed that that in 2024 there would be a “softish landing” – possibly a mild recession, with most concern about the impact on Credit Lines and consumer lending in particular. Worries were also expressed about Small Business lending, which panelists believe to be most challenged from a cash flow perspective. There was discussion of the “regulatory framework” as requirements continue to grow. The new 1071 small business rule adds additional need for compliance dedicated resources. Banks will need compliance systems and staff, which, in some cases, forces some community banks without scale to merge.

Detailed Notes

Stress Testing in Community Banks
In this session three community bankers discussed their stress testing programs. One bank was $700MM, another $1B and the third $8B

Comments included that the OCC has an expectation that you are doing stress testing and the $700MM banker explained that they follow the 2012 OCC guidance on stress testing for community banks, which lays out prudent stress testing best practices. They use call code information as a top down stress test approach. The results of this can be folded into capital planning. The larger bank said that they began stress testing just to “check the box,” but they now have it fully integrated into their credit risk process. A “bottom-up” approach at underwriting and then top-down periodically is utilized roughly twice a year. They use the results in their capital planning, formally for some, and for others, less so.

There is a cross over with concentration management – and credit can help identify those concentrations to stress. Banks are always looking at non-owner CRE – stressing mild/medium and severe scenarios, interest rate, NOI, and/or cap rates. The larger banks do some back testing to see if those loans that failed under stress actually did fail, and they said that their accuracy was pretty high.

In addition to CRE, some banks are stressing Hospitality and one was looking at collateral located in flood hazard areas – in addition to performing other ad hoc stressing. All panelists agreed that the process/model shouldn’t be static and that it needs to be proactive – looking at emerging concentrations and risk. Lately, due to the interest rate changes, banks are identifying loans with fixed rates and repricing. Another banker was looking at tenant concentrations within their CRE portfolios. All three panelists want to avoid complacency.

The panel concluded with a discussion of the importance of collecting good data and keeping it updated. This was identified as a key issue, and it was discussed that smaller banks don’t have the staff allocated to do this on an ongoing basis. One of the bankers says they created and maintained a CRE database that included the key items needed for stress testing.

Physical Climate-Related Risk
This was a big bank presentation on what’s happening in climate risk with a particular focus on the acute physical risk of climate events and their impact on insurance. Climate risk managers at larger banks – Fifth Third, US Bank, Banco Popular and Bank of America and an insurance expert from “AON” were the panel.

Each Bank on the panel has its own geographic footprint which has a significant impact on their approach to managing climate related physical risks. Banco Popular is primarily in Puerto Rico, which presented unique issues, but they also have a presence in Miami to manage. Bank of America, in particular, and to a lesser extent, US Bank and Fifth Third have a nationwide presence with some geographical concentrations. Fifth Third is primarily concentrated in the Midwest and so is more concerned with flood. Others talked about wildfire as a major concern.

All banks said they were hard at work collecting climate data. All used a third party to collect and sort out the specific data. US Bank suggested that banks can look at the FEMA NRI (National Risk Index) data – to see what’s available for free from the government. Education on climate risk is important now – internally and with clients. Also, an awareness that LMI (Low and Moderate Income) populations can be more impacted than other populations due to where they live and their relative lack of affordable resiliency resources.

One bank said that they now send out a questionnaire to their borrowers asking about capital set aside to deal with climate issues and resiliency.

Access to insurance for commercial clients is tightening. Good insurance coverage is key to successful and timely resiliency (and reconstruction) for borrowers. Banks are looking at potential credit losses vs. insurance coverage and reevaluating if the risk to the collateral is covered. They are also looking at the impact of insurance on borrower LTV levels.

The insurance expert on the panel suggested that banks need to look at and understand their exposure in geo-locations, and start to identify potential insurance coverage gaps. Banks should assess each peril (physical risk), and its severity, by location. Bankers should get their corporate insurance partners involved in these discussions. Climate risk is starting to be priced into insurance costs.

The insurance expert explained that, by law, in most states the insurance premiums are determined by the past 20 years of actuarial historical data. In many states, such as California, you can’t use predictive model data for premiums. So, as risk is increasing, insurance can’t address it in the premium. There was discussion of “parametric insurance” which is coverage in which specific frequent risks are called out, and a specific surcharge for it. If/when that risk event happens, the customers are immediately paid out, without the need to follow the traditional refunding process.

The bankers generally said they are not yet including climate risk considerations in the loan underwriting, as the insurance changes noted above are more or less “taking care of the extra risk considerations” so far. There was a discussion of the need for awareness of impact on LMI and how CRA needs to be involved – an overlay of high climate risk areas with CRA areas is helpful. Sharing of data between these two groups is useful.

Finally, there was talk about performing scenario analysis – question what would happen if an acute risk event occurs, and what the possible impact would be. Bankers need to understand the risks and potential range of outcomes.

Impacts of Regulatory Thresholds
This session was primarily information from a law firm that assists larger banks in the compliance issues when passing certain regulatory asset size thresholds.

The session started with a review of regulatory thresholds from the Fed – in particular those listed in the “Dodd Frank Act” – which stipulated certain compliance rules for banks over $50B in assets. This was adjusted up to $100B under the Trump administration in 2018. There has been recent discussion in Washington about possibly “right sizing” the thresholds back to $50B, since perhaps, pushing up to $100B went too far (SVB as an example).

The presenters explained that there are four “tiers” of banking. The smallest ones up to $50B, then Category IV which is $100B – $250B, Category III – $250B – $700B and Category II $700B and greater. Finally, Category I which are considered the largest “Systematically Important” bank or “G-SIB’s.” Within those categories are different levels of risk, business models, risk profiles and appetites. Recent events (SVB, First Republic etc.) suggested that possibly Category IV should be treated more like Category III Banks.

The OCC uses the term “heightened expectations” for scrutiny, which starts at $50B in assets. The FDIC focuses on the tenants of the “three lines of defense” for banks over $10B in assets. The three lines of defense were described as internal management oversight, Risk and Compliance monitoring, and Internal audit – continuous, independent compliance.

Most banks use acquisition to grow quickly when nearing thresholds. The panelist stated that “You don’t want to be just a $101 billion dollar bank,” since you need scale to manage new compliance expectations. To manage the growing compliance burden, you need to have the resources, which, in turn drives a lot of M & A activity.

More enforcement actions are being published, as by the end of this summer, more enforcement actions had already been issued than in all of 2022.

It was suggested that banks planning to merge should address the impact of compliance on their future size – and all the compliance issues that come with that – well prior to announcing their intention to merge.

Being a Bank Director
This session included ex-regulators, current bank board members and a large bank risk manager (from PNC).

Much of the early discussion touched on “March Madness” (the SVB, First Republic failures this spring) and how a “lack of effective board oversight” contributed to those issues. The difficulty of trying to decipher the mountains of information provided by bank management was discussed, but at the same time it was understood that it is crucial to get good useful information to use when offering constructive challenge to bank management.

One panelist described being a board member as being “noses in, fingers out” in that you need to look into what’s going on, understand what management is doing, have lots of conversations with people, and ask questions, all without directing bank activity. Board Members, as they described, “Work at the behest of the shareholders and the regulators”. Their primary role is to provide oversight and credible challenge to management.

Due to the fact that banks have a responsibility to protect FDIC deposit insurance, board members have the unusual role (for corporate board members) of having two “masters” – both the shareholders and the regulators. It was pointed out that the Fed had published a paper on best practices for board members for banks over $100B. The panelists felt that the points the Fed made in their paper can be applied to directors of any sized bank (see SR letter 21-2).

The changing composition of the board as it has evolved today was also discussed. Bank boards used to be sourced from “commercial pillars of the community” like auto dealers, commercial developers, and attorneys, as they were chosen to help generate business for the bank. Now, as bank boards have evolved, they are looking for diversity and knowledge of banking. Diversity includes experience and in ways of thinking. Knowledge of issues like cybersecurity are more important than ever. There has also been an evolution of the amount and type of training offered for directors. PNC has an actual program that allows new board members to get to know PNC and its Risk Profile, which they all said was a great idea.

The panel agreed that the responsibilities of the board have also evolved. The board now has to have a deeper level of understanding of what is going on, and provide a deeper level of governance. There are now more board meetings – sub-committees and others, so it’s not just a quarterly thing anymore. One director explained that, thanks to the SVB mess, there is a renewed focus on “what can cause the bank to fail?” How to identify and deal with a future crisis before it happens is a priority discussion point. Now a timely, forward-looking agenda that examines emerging areas of risk is a requirement.

The ”Black Swan effect” was also discussed – COVID, the SVB crisis, etc. What did we learn from those events, how does it affect us, what can we do – could this happen to us? These are discussions currently happening in Bank board meetings.

The board members expressed concerns about the management reports sent to the board, and the challenge of getting the right amount of information was discussed. One panelist asked “What are the essentials? What are the five most important takeaways? We want concise analysis – two to three pages, not a dump of information”.

The panel then discussed who presents materials and issues to the board. One suggested that if the topic is technical, they want to hear from the team/expert directly. If it’s more strategic, a member of management/leadership team should present. One panelist suggested that the CEO should explain what they are thinking about – so the board can react to that. “What keeps them up at night?”

Rising Credit Risks
A panel of two large bank lenders – Truist and Mellon – facilitated by a representative of “Oak North” which sells portfolio management services. This session included a wide-ranging discussion with a focus on capital markets and current economic trends.

The panelists said that the “demand is still there” but that people were acting more conservatively, less opportunistically – mostly due to capital constraints. There is more negotiating of terms (“horse trading”) in the current environment. Due to this, relationship banking is more important than ever. “You have to double down on your most important relationships”.

Challenging segments under current conditions were discussed. The panelist from Truist said that he was concerned with the ”consumer discretionary sector”. He said consumers were less likely to buy at this point, and are not proactive on investing now. He cited higher borrowing costs for this situation, which leads to less cash flow available. The representative from Mellon agreed and pointed out that consumer spending has been an issue since COVID, and inventory continues to be a problem. There is a regulatory focus on emerging risk now – enhanced monitoring and early risk identification. Office CRE is always a concern, but also all inflation sensitive industries need to monitored. Refinancing risk in C & I is starting to be a concern.

Idiosyncratic risks that are hard to anticipate are a current issue – the “black swan” events like the Maui wildfires, etc. “We can’t manage them like financial risks”. The panel agreed that auto loans could be problematic – with higher interest rates and affordability issues, along with uncertainty for the consumer. Subprime auto loan delinquencies are up and very high, higher FICO scores will likely be needed.

The climate-related credit risks from the eventual transition to lower carbon footprint industries and practices was discussed. “It’s an emerging risk that all banks will have to grapple with”. In Europe the rules and practices are pretty well defined, with specific guidelines and disclosures – including identification of high-risk industries. It is not so in the US today, but the industry is working on it – the recent release of the Interagency Regulatory Principles, a framework for managing climate-related risk was a start. Also helpful was the voluntary effort with the “G-Sibs” to create some climate related scenario testing. An obvious area of focus is CRE – and Residential – they are dealing with the physical climate risks as well. There will be new regulations evolving there – and questions about what will it cost banks to comply.

The panelist talked about how for most larger banks, third party experts are being brought it to collect data on climate risk and help build models to quantify it. It will take a while for the approach to evolve and mature, but it’s coming. It is starting to be factored into underwriting, a number of vendors sell discount and loss factors for specific locations and property types for banks to consider. Stress testing of higher risk scored climate segments will happen – it’s just a matter of time.

There is public information out there banks can look at. For example, the Transition Pathway Initiative (“TPI”), a good public resource that explains many large banks’ transition risk, is a good place to start. Bankers can see what other banks are doing and it can help you start to build a framework for your own institution.

There are strategic opportunities in managing climate related risk for banks to consider as well. Bankers can help their borrowers deal with the transition risk. Banks and their borrowers are already dealing with higher insurance costs in many locations – wildfire and hurricane impact, etc. As bankers, we can help borrowers understand if there are gaps in their insurance coverages, etc. We can also work with management to alert and steer clients to target higher growth industries. As one panelist put it, “Wouldn’t you rather lend to Electric Vehicle manufacturers (growing by 90%) than combustion vehicles where growth is flat?”

Bankers can also help our CRE property managers with planning to retro fit their buildings’ HVAC systems to become compliant with new emission rules that are coming. The panel agreed that this is all a natural offshoot of relationship banking, which has always revolved around educating and helping our borrowers succeed.

New Challenges for Community Banks and Emerging Risks
This discussion panel had three community bank CCO’s – one from Texas ($2.5B), California ($7.5 B) and Connecticut ($600MM). Each were asked to talk about what they felt were worrisome emerging risks.

The smallest bank representative said that they were very concerned about the near-term credit environment. Things have been so stable for so long and they will have to change – higher interest rates will make it happen. The temporary economic relief structures and funding has worn out. Bankers are not used to dealing with these types of issues. If you add in higher taxes and growing insurance costs, they believe that the future will be tough, especially for small businesses.

There was a discussion of managing CRE concentrations. Some banks won’t do office deals at all at this point. Other banks will do them, but will look for risk mitigants. Few are lending on spec now. Everyone should be stress testing interest rates – 400 BP at least. Now, when deals are done, banks look harder at liquidity – and they want to get the operating accounts and deposits for a clearer line of sight into their borrower’s cash flow.

Each panelist was asked about their most recent interaction with regulators. One Banker emphasized the deeper level of detail taken in their safety and soundness exam with the FDIC after “March Madness”. Their bank was asked about their deposit base, funding, concentrations, stress testing and their liquidity plan. The examiners asked about detail and their questions were probing in nature – particularly around interest rate risk in the portfolio.

Another banker had an OCC exam that completed in June. The focus was on ALCO, interest rates, and credit. They “dove into credit, but not too deep”. The examiners were particularly hard on Cyber and IT risk – they appear to be pushing down rules originally laid out for only larger banks in this area.

Another OCC bank reported that they were a training site for new OCC trainee’s so the exam coverage was broad – including a hard look at compliance and IT issues. This bank has been part of targeted reviews over the past year for Credit, SBA and Cyber.

Community Bank Management of Concentrations
This session was a discussion of concentration management – best practices and processes for community bankers.

A couple of the bankers focused primarily on their CRE concentrations – being at or over the 300% of capital threshold. CRE concentrations were tracked by CRE property type (Hotel, Mutifamily, etc.) One banker has come up with a way to quantify the higher risk concentrations by assigning higher dollar value to exposures based on their risk rating. For example, a “pass 5” is standard, but “pass 6” is worth $2 for every dollar. They apply three tiers of weighting. The regulators liked this approach as it added credibility.

Another bank adopted a Dual Risk Rating system – particularly for their large C&I portfolio concentrations, breaking the C&I portfolio down by NAICS code. The smallest bank in the group said that they had a concentration in mobile homes more than 20 years ago, and had been managing and tracking that ever since. There were some charge-offs, though overall it was profitable, they are now mostly out of it.

The banks were asked to talk about how they developed their concentration management processes. Some started with the basic regulations, then overlaid their own policy on top of that, then they discussed it all with the board. Their strategy was to not try to track too many concentrations, and try to keep it simple. They looked at concentrations with correlations to losses and emphasized those. They report concentrations to management, the board and the line.

The smaller bank reported that they were under the 300% CRE threshold, and so, focus more on policy limits on exposure, tier one capital, etc. They have policy limits on NAICS code (industries) and sources of repayment.
One banker tracked a concentration in vacation homes and other residential RE in coastal areas. They look at Rev Par and hotel rates – and as they are at the 100/300 level “the board doesn’t like being in that 300% bucket” so every RE deal is heavily evaluated. They are not rejected out of hand, but they must be justified.

There was discussion about the fact that concentration information should be clear and widely shared and discussed within the organization. One banker stated that the board and management understood the importance of concentration management, but they still had a way to go pushing that awareness down in the organization (including the line).

The moderator asked about any regulatory feedback on the bank’s concentration management practices. Most reported that they had good conversations with the examiners about their concentration management practices. If they had good tracking and monitoring systems in place, they were fine. Another mentioned that they always manage and track concentrations by “Exposure” (as opposed to just “outstanding” balances) and that the regulators liked that, along with the risk weighting factors that they have built in. There was a comment that once a regulator suggested to a banker to look at any crossover/linkage between CRE and C&I concentrations. They didn’t find any.

One of the bankers explained that the regulators did like that there were concentration limits in the credit policy, and if the limits were threatened or breached there were documented tiers of response. (If the 300% limit was breached up to 400%, new tighter underwriting standards are enforced. At 450% there is a hard cap and sell down). Their policy is updated as new concentrations are identified. This is thoroughly integrated with the policy and the board.

The discussion then went to the need for good data. One banker said that since they were relatively small, coding errors were pretty obvious to see – though they did pay attention to coding accuracy using a post-closing Q/C process. Another commented that if you have good controls “up front” it helps. It also helps that when you are doing a targeted exam in credit of loan review, that you scrub your codes then.

The session wrapped up with key takeaways. Comments included: “You have to constantly and vigilantly watch for changes in concentrations, then share them openly with the board, management and the line.”

“What does it do risk, capital and the reserves? You also need to be forward looking – in a couple of years what should you be monitoring? You have to be intellectually curious and think of what might be next, geographical concentrations? Tenant concentration? Shoreline exposure?”

One area of focus was fixed rate CRE loans that are repricing in 2023, 24 and 25. Bankers need to look at the overall impact of that concentration then and loan-by-loan considering the interest rate environment.

Update from the OCC
With Acting Director of the OCC Michael Hsu – Moderated by Nancy Foster. In a one-on-one moderated discussion, Nancy from RMA asked Acting Director Hsu to comment on a wide range of issues.

Commenting on OCC priorities, Hsu said that they haven’t changed a lot because banking is primarily about trust, and we have to look at what the threats are to that trust. These threats include the growing non-banking sector, the impact of climate risk management and overall complacency. Also, bankers still have to worry about the “blocking and tackling risks” of liquidity, credit and operational risks like Cyber.

The new interest rate environment is actually more “normal” that what we have been used to for the last five years. So, while interest rate risk is considered a new issue for banks, it’s really not new. Unfortunately, a lot of banks staff aren’t very familiar with this situation. ALCO should be a lively meeting, but people have taken it for granted, and that should be reevaluated.

When asked if “Bank failures are behind us” Hsu stated that he believes the “Systemic risk of bank failures” was properly addressed. Individual banks may fail for many reasons, but the OCC’s goal is an orderly process. It is important to look at concentrations, take a hard look at CRE and Office and compare them to your liquidity, these are current risk areas.

On climate – “We issued principles for banks with greater than $100B, and overall, large banks are making process. They are investing time and money into it. But we are all learning this together – there are still a large range of practices. It is good to apply risk management practices we understand, but not be bound by them. We need to think out of the box too. There is an insurance gap out there, banks can help there, and it’s likely to accelerate quickly. But, let’s not forget that climate risk management is not all downside – there are also business opportunities.”

On Basel III – “This is unfinished business, we are in the comment period for large banks. We are open to a better way. Any risk framework should include Accurate Risk Capture, Sensitivity (to the appropriate level), and Consistency. It should also have appropriate conservatism.”

On Community Banks – “There are significant challenges and opportunities. The OCC has over 800 banks with less than $1B in assets. There is great diversity. Challenges include digitalization and managing investments. These are strategic issues, or should be. To respond to comments about cost of supervision, the OCC reduced their exams to 18 months instead of annually. There are still great opportunities in relationship banking – and that won’t go away. There are opportunities to redirect banking clients to the community banks – like PPP did.”

On Third-Party Risk management for community banks – “The Third-Party Risk Management interagency guidance got a lot of comments, as community banks have limited bandwidth to give to this effort. We have deliberately put space in the Guidance for community banks to work with.

Collaboration with other banks, industry consortiums, etc. “A number of options can be explored.”

On Innovation: “Crypto and tokenization is dividing. Tokenization appears to be helping solve problems with settlement, deposits, but it’s complicated. AI falls under ‘responsible innovation’ and is not new. Generative AI is new – and bankers need to learn to walk before they run. Banking as a Service is changing – it needs to be safe, sound and fair. But it is not all the same, we need to establish a path to safety.”

Community Bank CCO/CRO Panel – Three CCO’s were interviewed, one from a 500MM bank, two others were from banks just over $2B. They discussed their current credit related concerns.

One CCO expressed concern about the near term economic conditions – They are comfortable now, but aware of the danger of complacency. Office, CRE Concentrations have to be looked at.

Concern was expressed about rate resets and borrower liquidity. Construction is also worrisome. The 2022 financials are just now coming in, providing a look at borrower’s financial status. One of the panelists created a list of all of the loans resetting in the near term, and applied a stress test to those to see potential vulnerabilities. They were seeing some softening of cap rates as well – particularly office.

Most agreed that in 2024 there would be a “softish landing” – possibly a mild recession. All are worried about credit lines and consumer lending in particular. Concerns about Small Business lending were also expressed – they are most challenged from a cash flow perspective. On the positive side, the job market is strong and consumers are proving to be resilient.

There was discussion of the “regulatory framework” as compliance requirements grow as the bank grows. The new 1071 small business rule adds additional need for compliance dedicated resources. You need to have systems and staff, which in some cases can force community banks without scale to consider merging. There is renewed focus on stress testing CRE concentrations, particularly office. Also, there is concern about large bank rules trickling down to community banks, and we are seeing it in the IT/Cyber space now.

Technology investments were discussed, with most banks saying they are investing in internal operational systems to gain efficiency. They are studying AI, and how it could be used, but staying away from it for now. Some were looking to develop “red flag” reporting to help manage the smaller loans in the portfolio. They are not sure if automation of credit monitoring in this manner will work, but the anticipated deterioration of the economy may prove it out.

The conversation wrapped up with a discussion on staffing, and trying to maintain staff in this competitive environment. Some are hiring right out of school and training credit staff themselves – but remote training is difficult. One bank actually hired a recruiter. The use of contractors to replace staff was discussed as an alternative that can work – for credit analysis, loan review and stress testing for example.







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