LIQUIDY FAILURES WINDING DOWN AS INTEREST RATES PREPARE TO DROP
We are hopefully passing the era of liquidity failures. As a former regulator I only saw problem and closed banks primarily due to documentation and collateral valuation failures. Bank runs and liquidity failures were last seen in any numbers in the great depression.
ASSET QUALITY MONITORING
It is time to quickly move our focus back to asset quality and increased monitoring of the portfolio. I have received indications from several sources of possible deterioration of consumer and commercial portfolios. Our client base is protected as much as possible by using the available controls in LQAS. They came through the Great Recession intact. Half of our clients were five star rating with Bankrate, the other half four stars.
SURVIVE THE ECONOMIC ROLLER COASTER
Since the company started in 1983 we have seen several economic cycles including two of the most severe since the great depression. A common thread is that banks use whatever they have in place during good times and after a severe shock. We see a great uptick in sales in banks that see a downturn coming. The banks are that are declining in a severe shock do not have the available capital or time to avert their freefall. Some banks implement our system in time to convert all of their data and unfortunately many miss the opportunity. One major Texas holding company tried getting serious ninety days before failure.
OCC FAILED BANK STUDY
Using the failed bank study from the OCC as a model we have controls to reduce the risk of loss or classification in every area of their report.
The main cause of failure according to the OCC study is inaccurate, expired or missing documentation. This is the first feature we created in LQAS to stop or greatly reduce this problem. Many clients were tracking minimal document categories before installation. The biggest common thread to this day is not supervising collateral values. This leads to the second cause of failure.
Inadequate collateral value monitoring is the second largest contributor to failures according to the study and our experience. We have created many methods to ensure the bank has an accurate value as possible on every loan in the portfolio. Once loaded LQAS can list every loan that has inadequate collateral in relation to a loan to value target is listed in seconds. The entire portfolio can be updated weekly depending on collateral type.
PROBLEM AREAS DEFINED BY CLIENTS
Discovery of many other weak spots have been uncovered utilizing a team effort between our clients and our staff. Whenever a regulator visits a client with a new observation or request that affects them, they call us to decide if an enhancement is needed.
We have discovered and corrected many bad habits conducted by the lending staff sometimes before a regulatory visit. LQAS is very efficient. A new feature, portfolio grading with writeups runs in two seconds in a four hundred million dollar Louisiana bank. Review samples are defined in minutes. Exam prep in minutes with key reports being available in seconds. Once the bank is examining itself on a deal by deal basis it encourages the regulators to spend their time at other banks where they are needed.