Recession Watch Resumes: What It Means for Banks

Earlier this year, some observers marveled that an expected recession was still not taking shape—even in the face of rapid interest rate increases. In January, the Associated Press noted growing optimism that a downturn could be avoided. In February, a New York Times headline began with, “What Recession?”  

That narrative came crashing down with the prominent failure of three banks and the rescues of two others. The recession watch is back on.

In a TV interview this week, Minneapolis Federal Reserve President Neel Kashkari said the stress that grabbed the world’s attention with the collapse of Silicon Valley Bank “definitely brings us closer” to a downturn.

Banks with deposit and other challenges could cut back on lending, “leading to a widespread credit crunch. That credit crunch ... would then slow down the economy,” Kashkari said.

For the Fed, the current environment is cause to be on high alert for signs of waning confidence in the banking system. For banks, it is time to brush up on recession playbooks and refine lending decisions to reflect the rising credit risk that accompanies any recession.

Banks can be in a better position by conducting big-picture and account-level stress testing before the cycle changes. They can also look for early warning signs in the loan portfolio—including more people making minimum payments or struggles in a certain sector (such as office properties)—and have a plan to boost loan workout capabilities, if necessary.

Be prepared: RMA has a credit risk seminar series called “Are You Ready for a Recession?” Topics include how to measure the potential impact of a recession on banks and clients, analyzing borrowers during distressed times, and moving from a lending group to a workout group.