Recession Risk Management

The fear of recession quickly spreads in the last 3 months.

Meanwhile, the consumer credit loss rate is still historically low.

How to manage a consumer credit portfolio now? Here are some ideas:

👉 Reduce Unwanted Exposure

This is the time to quietly brush the dust off your exposure reduction strategies, if they have not been deployed with scale for a while. Via CLD and inactive closure, you want to remove some unwanted exposure before the economy tide shifts.

👉 Cautious Product Decisions

Some lenders begin to review their business lines and might make some strategic exit decisions. At the same time, other companies are still rolling out new products. There is nothing wrong with the new product release, but you need to be prepared to hit the brakes at any time.

👉 Get Prepared

It helps to begin thinking about the recession scenario, something maybe nobody likes to talk about except the risk folks. Don’t be afraid to be the pessimist in the room at this moment. You don’t want to stop the business, just inject some caution into discussions and decisions.

If you are using historical data to review a strategy, always add in some additional cushion to cover the possibility of an upcoming recession. The farther you are from the last recession, the more likely you’ll run into a new one soon.

🏔️ Plan to Safely Descend

In this phase, you are approaching the peak of the mountain, enjoying the thrill and the beautiful view near the top. However, getting to the top is only half the job. What is more important, and many people do not realize this, is that you need to descend safely. In order to achieve that, you need to have a good idea about the time and resources that you need to come down with safety.

Descending needs time, so you do not want to do it too late. Start to descend when the sun is still out there and the condition has not deteriorated yet. Also, make sure you have the right supplies and tools.

This post is an adapted excerpt from my book “Unsecured Lending Risk Management”. The link can be found in my Featured section.