Strategies for a Downturn

No one can say when our historically long expansion will end. When it does, though, will your financial institution be ready? During RMA’s Risk Readiness Webinar, Rick Buczynski, Ph.D. SVP/chief economist/financial architect, IBISworld, Inc., shared proven preparedness tips to manage the end of the credit cycle and position your institution for the recovery.

Buczynski emphasized that as the credit cycle turns, institutions need to focus on several important factors including differentiating discretionary versus non-discretionary spending, understanding industry volatility, and monitoring concentration risk.

Industries dependent on discretionary spending (i.e., luxury goods) are more vulnerable to downturns than non-discretionary spending (i.e., necessities). Buczynski warned to watch for discretionary spending in portfolios. This also includes private schools and durable goods (i.e., washing machines, refrigerators) which are also vulnerable in a recession and have higher default rates.

Buczynski also warned not to overlook volatility. Industries with consistently high volatility include agriculture, forestry, fishing and hunting, mining, utilities, construction, and finance and insurance. He also recommended disregarding the domino effects of hidden concentration risks. Although tracking each line of business poses challenges, the process is simplified if you code by NAICS. Common factors and supply chain links are often neglected; so be aware of hidden, unmapped exposures that are unaccounted for. Concentrations aren’t necessarily negative if banks have strong in-house expertise in a particular industry.

Safe havens for lending exist in super-sectors, which employ a high proportion of STEM workers (science, technology, engineering and math) generating about 80 percent of new patents and spend almost 90 percent of total R&D. Super-sectors generate an outsized 60 percent of U.S. exports despite representing less than 10 percent of the nation’s employment. Some of these super-sectors include industries in manufacturing, energy, and services industries.

Buczynski advised banks to beware of industries that have become overly dependent on low interest rates: small retail (mom and pop shops with thin profit margins), firms that carry heavy inventories, construction-related, and CAPEX or CAPEX-related.

For deeper insight into each of the subjects mentioned in this blog post, please read Buczynski’s articles that have appeared in The RMA Journal and can be found on our website:

  • Flying Blind Into the Next Recession? Part 1
  • Flying Blind Into the Next Recession? Part 2
  • Flying Blind Into the Next Recession? Part 3
  • Flying Blind Into the Next Recession? Part 4
  • Flying Blind Into the Next Recession? Part 5
  • Flying Blind Into the Next Recession? Part 6
  • Flying Blind Into the Next Recession? Part 7
  • As the Credit Cycle Turns: Banks Need to Get Serious About Managing Concentration Risk

If you missed the live webinar, you can purchase a recording here.

Join us for upcoming offerings of the Risk Readiness Webinar Series.

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