Macroeconomics and your credit decisions

Posted on July 10, 2018 at 10:00 AM by Mike Horrocks

The following blog is in honor of America’s Independence Day and my son FINALLY completing his Economics course in high school.  It is not an endorsement or objection to any political party. There…that is out of the way—on to the blog!

I love economics.  I have to admit that economics classes were some of my favorites in business school.  I still to this day geek out when I get to hear a good economist speaking at any of the banking industry conferences that I get to speak at or attend.  But as a former banker, I just never saw enough incorporation of risk at the macroeconomic-level being considered in any underwriting or risk management—or at least to the level that I would like to have seen it.   So, I am writing this to perhaps spur a little thought about the “What ifs?” that economics are supposed to make us consider.  In no particular order…

“What if?” #1:  Tariffs, trade wars and cars

In a recent article, it was called out how many credit unions are seeing top-line growth in car loans nearly exceeding 10% year after year. This is fantastic growth and is a clear reason why credit unions can tout that they have captured nearly 35% of the total loan portfolio in the auto industry.  However, here is the “What if?”:  What if the tariffs that will most likely go into place, have their expected impact and raise the cost of cars by $5,000 each?

How would you continue to grow your market as prices increase for those cars we love causing demand to decrease?  Ask yourself what kind of backstop your financial institution has in place while you either search out and find new sources of loan revenue or determine what other actions to take.  Now is the time to use analytics to discover what products would be the next “best fit” for your customers and how those products can optimize your wallet share.

“What if?” #2: Recession and reaction

Okay, I said it—recession.  Just don’t blame me if one happens the day after this blog, okay?   I can’t get any consensus from economists or CEOs on when one will occur, but most agree that the “if” is not a question at all.  In fact, at a trade event a year ago, I recall one top CEO at a bank here in America (that was a hint) saying that his economists are not sure what form it will take or exactly how it will happen, but they all put a bet on one occurring.  Now, they are not forecasting it next week, or even next year—they just know that something is on the horizon and certain actions could make it happen sooner than later.

So what will your bank do when the slowdown happens?  Will you be prepared, and have a system in place that will actually be proactive in monitoring the loans and then be able to adjust the loans appropriately?    

“What if?” #3: Pricing and Quantitative Easing

After economics, my next geek out trigger is loan pricing and profitability, and that topic is also my final “What if?”.  Quantitative Easing (QE) has been the response in a lot of earlier downturns, but with QE having been used so much, we find ourselves at the point that we simply cannot rely on it as much.  This rate environment makes it so we have much more reliance on the correct and optimal pricing of the loan, based on risk and sound profitability methods (not just matching rates of your competitors).  This gives your institution the ability to have the lift you will need while everyone else is just going up and down with the Fed’s adjustments.  Pricing will make the difference as margins continue to narrow—and margins will always continue to narrow.

So take the “big picture” view of risk and continue to ask, “What if?”.

Topics: Market Trends

Mike Horrocks

Written by Mike Horrocks

With more than 25 years of experience in the financial services industry, Mike Horrocks possesses a unique and extensive blend of financial expertise, technology skills, process redesign abilities and solution management experience. Horrocks’ background enables him to create go-to-market strategies for new solutions, help clients convert strategies into revenue generating initiatives and forecast market direction. As the Vice-President of Marketing at Baker Hill, Horrocks’ responsibilities include the identification and development of new market opportunities in the business of lending, risk management, and analytics for financial institutions. Mike holds a MBA both in International Finance and Venture Technology Management from Indiana University and a B.S in International Finance from Brigham Young University. Before joining Baker Hill, he held executive positions within several other organizations, including Experian, Profit Technologies, SAIC, Broadway and Seymour (FIS), Zions First National Bank and Zions Data Corporation. Horrocks is a member of many associations including the Risk Management Association and Bankers Without Borders. In his free time, he enjoys traveling internationally with his wife and five children.

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