Emerging Credit Risk Trends

🚨 Emerging Trends Alert: Key Insights from the June 30th CECL Trenches 🚨 After two intense weeks of diving deep into clients' CECL calculations for June 30th, I've surfaced with some critical observations that every finance professional should be aware of: 1️⃣ Rising Problem Loans: While we're not anywhere near 2008 crisis levels, there's a noticeable uptick in criticized and classified loans. This is the highest I've seen post-2008, pandemic included. 2️⃣ Real Estate Appraisal Concerns: Collateral-dependent loans are in the early innings of feeling the strain. Recent appraisals are starting to come in lower, leading to larger specific allowances. If this trend continues, expect significant allowance increases across the industry since many of these loans had a specific allowance of $0 when appraisals were higher. 3️⃣ Economic Indicators Show Weakness: GDP projections are dipping, unemployment is rising slightly, and CRE valuations are declining. These factors are pushing ACL rates up by 3 to 5 basis points, potentially leading to higher-than-budgeted provision expenses. 📈 The upward pressure on ACL is real, and it's time to prepare. Future Fed rate cuts might help, but for now, I advise clients to forecast higher CECL allowances. Most banks have not had their CECL models tested by scenarios like this. Right now, we are kind of at an inflection point. The economy is overall fine and loan losses are still on the lower end historically, but the trend is more negative than positive. Some CECL models are undereacting and others are overreacting. Are you sure your model is up to the task? #CECL #Finance #Banking #EconomicTrends #LoanLosses #RealEstate #RiskManagement #BusinessStrategy

According to the May 2025 VantageScore® CreditGauge™, increasing mortgage delinquencies are signaling early signs of financial strain among U.S. consumers. In May 2025, mortgage loans saw the most significant year-over-year rise in early-stage delinquencies (30–59 days past due) across all credit products. The delinquency rate for mortgages increased from 0.92% in April to 1.03% in May—a noticeable jump that indicates growing stress, especially since people typically prioritize mortgage payments over other debts. These numbers indicate that financial strain is spreading to even the most creditworthy borrowers, with early-stage mortgage delinquencies increasing and mortgage balances reaching new highs. What’s particularly notable is that this uptick isn’t confined to traditionally riskier borrowers. While subprime delinquencies slightly declined, early-stage delinquencies rose noticeably for consumers in the Nearprime, Prime, and even Superprime credit tiers—groups historically considered lower risk. This suggests that recent financial pressures are broad-based and beginning to impact borrowers who have generally managed credit well. Additionally, the average credit balance hit a new high of $106,000 in May, marking the fifth straight month at a five-year record. Mortgage balances specifically grew 2.8% year over year, outpacing other credit products. Rising mortgage delinquencies—especially among Prime and Superprime borrowers—highlight that consumer financial health is softening. Households are showing early signs of stress, likely due to increased debt loads and economic pressures, and even those who have historically been low-risk are starting to struggle with keeping up with mortgage payments. This trend serves as a warning signal for both lenders and policymakers, indicating that financial resilience is eroding across broad segments of the population. #Consumers #Mortgages #Delinquencies #FinancialHealth #ConsumerConfidence #Debt https://lnkd.in/g2K378Fe

Happy to share a recent working paper, "Carbon Risk and Corporate Creditworthiness: Evidence from a Major Emerging Economy," led by Dr Marcin Borsuk. This is part of our research in the India Transition Finance Program (https://lnkd.in/gPiXXi77) and Environmental Stress Testing and Scenarios (https://lnkd.in/gQBjGpiv) projects at the Oxford Sustainable Finance Group at the Smith School of Enterprise and the Environment - University of Oxford as well as the UK Centre for Greening Finance and Investment (CGFI). Context: - Addressing climate change requires a swift transition to a low-carbon economy.  - Governments are introducing stringent climate policies to accelerate this transition.  - Evidence suggests that financial markets penalize heavy emitters in developed countries. This study: - India is increasingly exposed to transition risks as it engages with global climate efforts.  - This study examines how transition risk is priced into credit risk of Indian companies.  - This study also incorporates climate-economy scenarios to project how different climate policy pathways might impact firms’ default risk. Findings: - Higher carbon emissions are associated with significantly elevated credit risk. - The effect of transition risk on firms’ credit risk is heterogeneous and varies with firm characteristics. - Policy shift around the Paris Agreement has affected investor perceptions of credit risk. - Transition risk affects credit risk through two channels – reputation and cost of capital.  - Forward-looking scenario analysis further indicates deterioration of credit risk. Implications: - Regulators and central banks should incorporate climate risk into credit assessment frameworks to safeguard financial stability.  - Firms should strengthen ESG governance, financial resilience, and sustained low-carbon investment as effective hedges against elevated credit risk stemming from the low-carbon transition. #india #climaterisk #creditrisk #transitionrisk #emissions #reputation #costofcapital #governance #resilience #lowcarbon Working paper is here: https://lnkd.in/dwcBxZpG Executive summary is here: https://lnkd.in/dVmvmFSk

Kicking off the year with the release of our new Departmental Paper on corporate sector vulnerabilities and high levels of interest rates! I had the pleasure of leading this project over the past two years, collaborating with a great team: Nassira A., José Garrido, Deepali Gautam, Benjamin Mosk, PhD, CFA, Thomas Piontek, CFA, Anjum Rosha, Thierry Tressel, and Aki Yokoyama. Our paper provides a detailed analysis of the vulnerabilities that have surfaced in the corporate sector post-pandemic, emphasizing the financial stability risks in a world of persistently high interest rates. While some central banks have begun cutting policy rates, the expectation is that rates will remain elevated compared to pre-pandemic levels. This underscores the urgency of designing and implementing policies to prevent and mitigate risks from the corporate sector. The paper highlights several key findings: ➡️ Firms with substantial refinancing needs—the so-called "maturity wall"—face heightened challenges in rolling over debt as interest rates remain elevated, potentially straining their financial performance. ➡️ Should interest rates remain higher than current projections, corporate defaults could surge significantly, posing critical financial stability risks, particularly in emerging markets and countries with less developed banking systems. ➡️ The growing role of nonbanks in corporate credit intermediation, especially in advanced economies, heightens financial stability risks. The shift of credit to unregulated sectors raises concerns about how risks from a potential corporate default cycle could propagate throughout the financial system. ➡️ Despite progress in insolvency and restructuring frameworks since the pandemic, significant gaps remain. These shortcomings could hinder countries’ ability to swiftly resolve firms in scenarios of intensified corporate distress. Full paper: https://lnkd.in/eUynEVMz

Rising Interest Rates & Credit Risk: What It Means for Expected Credit Loss (ECL) With interest rates climbing, the credit risk landscape is shifting. As borrowing costs rise, more businesses and consumers face financial strain, increasing the likelihood of defaults. That’s where Expected Credit Loss (ECL) analysis becomes even more critical: Expected Credit Loss = Probability of Default × Loss Given Default 🔹 Probability of Default (PD) → Higher interest rates can lead to increased defaults, especially for highly leveraged borrowers. 🔹 Loss Given Default (LGD) → Declining asset values (e.g., real estate or collateral) may reduce recovery rates, increasing potential losses. 💡 How Financial Institutions Are Adapting: ✅ Stress testing loan portfolios against rate hikes 📊 ✅ Adjusting risk models to reflect macroeconomic conditions 📉 ✅ Strengthening capital reserves to absorb potential losses 💰 The key to navigating this environment? A proactive credit risk analysis process that integrates real-time data and forward-looking risk models. As central banks continue adjusting policies, financial professionals must stay ahead of the curve. 📢 How is your organization managing credit risk in today’s high-rate environment? Let’s discuss in the comments! 👇 #CreditRisk #InterestRates #RiskManagement #Finance #CFO

🚨 RBI's Red Flags in Consumer Credit – The Alarming Trends 🚨 The latest RBI report sheds light on some crucial trends in the consumer credit segment. Here's a breakdown of the key facts: 1. Overlapping Loans: A whopping 42.7% of consumers who took a new loan already had three or more loans. This isn't just overlapping debt; it's a potential red flag for financial stress. 2. Rapid Re-Borrowing: Alarmingly, 30.4% of these consumers had taken more than three loans in the past six months. It's a pattern that points to a cycle of debt that needs close monitoring. 3. Small Loan, Big Concern: Among customers with personal loans below ₹50,000, a significant 7.3% had at least one overdue loan. It's a small segment but indicative of a larger issue in lending practices. 4. Delinquency Insights: The delinquency vintage in personal loans stands at 8.2%. This trend suggests a decline in underwriting standards and a potential increase in credit risk. 5. Ever-Greening Risks: The practice of ever-greening loans is a concern, especially given that delinquencies in smaller loan segments are markedly higher. 6. Co-Lending Model Slowdown: With tighter lending norms, there's a looming risk that the co-lending model could slow down, impacting the credit accessibility for marginalized borrowers. So, the million-dollar question: How do we strike this delicate balance? How do we rein in risky lending without sidelining those on the fringes of formal credit? #RBI #finance #credit #debt #creditrisk #nbfc #bank #personalloan

As indicated on the European Central Bank Blog a few days ago, 𝗖𝗹𝗶𝗺𝗮𝘁𝗲 𝗖𝗵𝗮𝗻𝗴𝗲 is no longer “the Tragedy of the Horizon" as Mark Carney put it, but an 𝗶𝗺𝗺𝗶𝗻𝗲𝗻𝘁 𝗱𝗮𝗻𝗴𝗲𝗿. In the next five years, extreme weather events could already put up to 5% of the euro area’s economic output at risk, according to the new short-term scenarios of the Network for Greening the Financial System (#NGFS). Integrating climate risk into credit risk management involves assessing and quantifying the potential financial impacts of climate change on lending and investment decisions. This includes both physical risks (like extreme weather events) and transition risks (like policy changes). By incorporating these factors into credit risk models, financial institutions can better understand and manage their exposure to climate-related financial risks. In the UK, integrating climate-related risks into credit risk assessment is a growing priority for financial institutions and regulators. The Bank of England is actively working on incorporating climate risks into its monetary policy operations and is encouraging firms to enhance their climate risk management capabilities. The deadline for responding to the UK Prudential Regulation Authority's (#PRA) consultation on its updated climate risk management expectations is July 30, 2025. This consultation paper, CP10/25, focuses on enhancing how banks and insurers manage climate-related risks. The PRA's key findings as to areas for improvement by banks included: (1) scope to expand the range of loan portfolios subjected to a climate risk assessment, to pick up impacts on underlying collateral, refinance risk and ability to repay; (2) enhancement of data granularity and working towards embedding climate risk in loan-level credit risk assessments; and (3) expanding the range of climate scenarios considered, to better identify borrowers and sectors implicated by climate risk Climate risks can impact the probability of default (#PD) and the loss given default (#LGD) on loans, 𝗽𝗼𝘁𝗲𝗻𝘁𝗶𝗮𝗹𝗹𝘆 𝗹𝗲𝗮𝗱𝗶𝗻𝗴 𝘁𝗼 𝗵𝗶𝗴𝗵𝗲𝗿 𝗰𝗿𝗲𝗱𝗶𝘁 𝗹𝗼𝘀𝘀𝗲𝘀 for lenders. Climate risks can also affect the value of collateral, particularly in sectors heavily exposed to climate change impacts.  This compilation addresses this important topic highlighting the latest research and insights covering both credit risk integration and accounting implications of climate change. #riskmanagement #climaterisk #transitionrisk #physicalrisk #ECL #IRB #probabilityofdefault #creditrisk #lossgivendefault #recoveryrate #impairment #defaultrisk #riskassessment #riskmanagement #riskmeasurement #granularity #dataquality #stresstesting #scenarioanalysis #financialstability #globalwarming #climatechange #emissions #netzero #loanportfolio #borrowerdefault #creditloss #information #research #knowledge #resources #futurerisk #emergingrisk #novelrisk

As we look into the future, key trends are poised to reshape credit risk management: AI-Driven Analytics: Advanced AI and machine learning algorithms are revolutionizing risk assessment, enabling more accurate predictions of loan defaults and early detection of financial distress. These technologies are processing vast amounts of data, including alternative sources like social media activity and spending patterns. Integrated Risk Management: There’s a shift towards a more holistic approach, combining cybersecurity with operational risk management. This integration will provide comprehensive visibility and enable more effective risk mitigation strategies. Climate Risk and ESG Integration: Environmental, Social, and Governance factors will become central to risk management frameworks. Climate risk modeling and ESG metrics will be incorporated into financial risk assessments, driven by regulatory pressure and market demands. Dynamic Third-Party Risk Management: As the financial ecosystem becomes more interconnected, managing risks associated with third-party relationships will gain importance. Real-time monitoring and AI-powered risk assessment of partners will become more important. Regulatory Technology (RegTech): The adoption of RegTech solutions will accelerate, helping financial institutions navigate complex and evolving regulatory landscapes more efficiently. This will include automated compliance monitoring and reporting. These trends will reshape credit risk management, making it more data-driven, proactive, and integrated with broader business strategies. It’s an exciting time to be in credit risk management, that’s for sure.