The past two years have created massive, life changing challenges for just about everyone on the planet – and bank managers and board members are certainly no exception. While the public has been dealing with the Covid-19 nightmare, remote work challenges, child and elder care woes, and concerns about family physical and mental health, bank leadership has had to deal with increased internal risks (operational, cyber, staffing) and external ones (rapid market changes, stressed industries, and a lack of traditional financial measurements, since many businesses did not produce audited financial statements during much of 2020).

As we enter 2022, no one knows for certain how, or if, all of those daunting issues will be resolved. In recent statements, the banking regulatory agencies are suggesting cautious optimism in 2022, though they are wary of complacency and loosening credit underwriting standards. One of the key forces that drive innovation and change in the world is a crisis, and if nothing else, 2020 and 2021 have seen rapid change and massive innovation, including in banking. With this backdrop, let’s look at some of the related developments and some new trends in credit risk management that will likely take place in 2022.

One significant industry change preceded Covid, and that was another acronym that started with a “C,” which was CECL. The story behind the current expected credit losses accounting standard is long and tedious – but a by-product of that rule for most bankers was a newfound understanding of the value of their portfolio’s credit data and how that data ties directly to reserves, risk and profitability. Thanks to CECL’s requirement for vast amounts of historical data, including credit attributes like collateral types, delinquency, payments and segmentation, many banks invested a lot of time and resource gathering, inventorying and cleaning up their credit data for CECL compliance. A result of this activity was that like never before more banks have more information about their loan portfolios, borrowers and their historical and current behavior.

During the time that CECL implementations started, Covid hit and bank managers were challenged with remote work requirements along with addressing PPP and other fast-moving emergency credit programs – creating a need for innovation and automation. Many areas of the bank were suddenly faced with new processes, operations and technology tools that were unplanned. A result of this accelerated change was that areas like commercial lending, credit and loan review were forced to adopt new innovative ways to work. While some of these areas may return to “the old normal,” many will retain most, if not all, of the new improved processes and tools that were needed to survive the challenges of the Covid crisis.

Those two developments, along with a growing understanding of the importance of credit concentration management, are driving new opportunities and synergies in credit risk management in 2022. The concept of credit concentration management is not a new one in banking. Even before the Great Recession of 2007-2009, the agencies made it clear that concentrations could be “bank killers,” with subprime lending and investor-owned commercial real estate (CRE) clear priorities. But now, the combination of more readily available, relevant credit concentration data and new tools and automation have made it significantly easier for banks of all sizes to proactively manage their concentrations.

A very obvious but valuable case study on the importance of concentration management is going on right now at the start of 2022 within the retail, office and the hospitality industry segments. Suddenly understanding exposure to these industries and property type segments is a high priority. Unlike the past, this time banks are much better positioned with improved data, tools and a more automated approach. The next use case to look at in 2022 is portfolio concentrations based on exposure to acute environmental threats like forest fires, hurricanes and flooding. That will likely be an early first step as more banks incorporate the environmental, social and governance framework into their risk management programs.

Another often neglected, proactive credit risk management process that has gotten a lot more attention during the past two years is portfolio stress testing, or “shocking segments of the portfolio.” This practice was used widely in banking during the end of the Great Recession to effectively monitor CRE risk, but by 2015, most smaller banks performed only annual tests, most of which were not looked at as having much, if any, strategic value. Part of the issue was that the banks simply weren’t collecting enough credit data to perform meaningful testing, and there was a sense that money for stress testing tools could be better spent elsewhere.

Now with additional risk management tools and better data, stressing concentrations simply makes sense and is achievable for most banks. New stress testing programs for concentrations like restaurants and business hotels are the norm, while more comprehensive, and strategic programs are starting to be put in place in banks of all sizes.

As we look back at the years of the Covid crisis, it is only natural to think of the disruption, challenges and uncertainty that banks faced, some of which are still being faced today. But thanks to the forces that drove the challenges in 2020 and 2021, bankers rapidly embraced automation and performed proactive credit data management leveraging innovative practices. Banks need to seize those opportunities and continue to enhance their risk management processes, not letting those benefits pass them by. A 2022 with this more synergistic approach to credit risk management may make the future a little bit brighter for bank management.


Peter Cherpack

EVP, Senior Director of Credit Technology, Partner

Peter Cherpack is executive vice president of credit technology at Ardmore Banking Advisors, Inc., focusing on credit data management and risk control. Mr. Cherpack has been with Ardmore since 2002. He specializes in credit data management best practices, CECL/ALLL calculations, stress testing and concentration reporting solutions for community banks and smaller financial institutions.

Mr. Cherpack is a nationally recognized thought leader in best practices for concentration management, stress testing and CECL’s impact on community financial institutions, and a business partner of Computer Services, Inc. (CSI) and Argus. As part of Ardmore Banking Advisors, he brings a unique mix of banking and technological knowledge, along with extensive experience in credit/risk business process and data analysis solutions.