PHILADELPHIA, PA – (June 12, 2020)
The Risk Management Association (RMA) has released “Guidelines for Risk Rating Loans in the COVID-19 Period” to assist financial institutions in their loan grading process during the unprecedented economic uncertainty of the COVID-19 pandemic.
At a time when historic disruption is limiting the effectiveness of traditional credit assessment processes, the paper discusses methods to:
- Triage loan portfolios to more readily discern risk based on the degree of COVID-19 impact.
- Develop and use alternative information to offset lack of indicative financial information.
- Set triggers to monitor deterioration of risk mitigants.
- Thoughtfully balance the output of risk ratings models with expert judgment.
The Guidelines, a project of the recently formed RMA Risk Ratings Working Group, are designed to augment banks’ existing credit risk grading frameworks, protocols, and internal guidelines. They are considered a living document, to be informed by new insights as the future course of COVID-19 becomes clearer.
“Because of the economic uncertainty and shutdowns caused by COVID-19, a borrower’s current financial reporting is, more than ever, not necessarily an indication of an ability to repay,” said John Baier, RMA’s Senior Associate Director, Credit Risk. “In this environment, alternative information must be quickly developed and applied. RMA’s ‘Guidelines for Risk Rating Loans in the COVID-19 Period’ suggests practices lenders can incorporate into their analysis to ensure that loans are accurately graded.”
“The Risk Ratings Working Group is an example of the RMA community working together for the good of the industry,” RMA President and CEO Nancy Foster said. “This sharing of perspectives and practices is always important, but especially during this crisis.”
Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk management principles in the financial services industry. RMA promotes an enterprise approach to risk management that focuses on credit risk, market risk, and operational risk. Headquartered in Philadelphia, Pennsylvania, RMA has 1,900 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by 18,500 individuals located throughout North America, Europe, Australia, and Asia/Pacific.
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