Watching the Kettle Boil: Preparing for the Credit Downturn

Abstract: The 2024 Bankers Summit Panel, “Watching the Kettle Boil: Preparing for the Credit Downturn,” brings together industry experts to explore strategies for navigating economic uncertainty and credit cycles. Drawing on over 50 years of collective experience, the panelists reflect on key lessons from the 2008-2009 financial crisis, emphasizing the importance of proactive risk management, fast decision-making, and the value of maintaining lending operations during downturns.

The discussion also addresses the evolving role of fintechs, the relevance of alternative data in underwriting, and the impact of economic shifts on newcomers and retirees. Throughout, panelists stress the significance of balancing profitability with social responsibility, especially in protecting vulnerable populations from fraud. The conversation concludes with practical advice for credit professionals and a call to action for aligning business strategies with the broader economic well-being of the country. Watch the interview here. 👀

Lessons from the 2008-09 Recession

Brent: In early 2007, while at HSBC, we learned we were writing off $1.8 billion in subprime mortgages and shutting down consumer lending—half the team lost their jobs. In 2008, when Lehman Brothers collapsed, it became clear that even major institutions could fail. Losses doubled within six months. A key takeaway: recessions impact asset classes differently. Prime assets doubled in losses, while subprime assets rose by less than 50%. It’s not just about pulling back on risky assets but ensuring proper pricing across the board. Acting quickly during downturns and being the first to re-enter the market are crucial.

Amit: I joined Capital One in 2007, just as the crisis began. The key lesson is preparation—you can’t react once the downturn hits. Some of the most profitable business cohorts came from downturns, as competitors had exited the market. Having a recovery plan is essential, especially for retail and commercial segments.

Fintechs and Technology

Ardalan: At FIG, we focus on combining finance and technology. Traditional banks have extensive data, but fintechs can act more quickly. Real-time data and alternative signals are key in decision-making. As Buffett said, “Data will eat AI for breakfast.” It’s not just about technology but how effectively you use the data.

Brent: Many fintechs launched during 2020-21 relied on AI without solid data. Now they’re struggling, like PetalCard and TomoCredit. Those fintechs that survive will have robust business models, not just quick-money strategies.

Amit: At RBC, we’re investing heavily in connected data models and AI-powered decision-making. We also value partnerships with firms that bring in niche expertise.

Adapting Credit for New Segments

Audience Question: How do you assess credit for newcomers to Canada and retiring boomers?

Amit: Newcomers are profitable when approached correctly. For example, RBC now offers unsecured credit cards, which didn’t exist for newcomers 16 years ago. Each segment requires tailored strategies—students, professionals, and permanent residents have different profiles. Boomers also have evolving financial needs, such as home equity loans. It’s important to offer the right products while protecting vulnerable populations from financial risks.

Managing Uncertainty

Brent: Monitoring early warning signs is crucial. In 2012-13, we developed a holistic bull-bear report, tracking internal and macroeconomic data. Unemployment is a key metric—job losses can quickly lead to delinquencies.

Amit: It’s essential to use multiple data sources, including credit bureau reports, government statistics, and industry insights, to avoid over-reliance on any single dataset.

Ardalan: We need to balance financial optimization with responsibility, especially as fraud targeting retirees rises. Credit is about more than numbers—it impacts lives. COVID-19 demonstrated that most people repay their debts if they have the means. Supporting customers with hardship offers during downturns is crucial.

Closing Remarks

Brent: Our industry must balance competition with collective responsibility. Sound decisions benefit both institutions and the country.

Amit: Credit decisions shape people’s lives. Building policies that support customers through all economic cycles is essential.

Ardalan: Fraud prevention is critical, especially for retirees. It’s our duty to act in the best interest of customers and the community.

Samantha: Thank you all for this insightful discussion. And thank you, Canadian Lenders Association!