Let’s talk about science, or more specifically, your psyche. Yes, this blog that is generally about finance is pivoting for just a moment, but bear with me, we’ll get back to your regularly scheduled reading shortly.
Does your institution have a strategy? Of course it does. No one would run a business without one. Does your institution have a strategy for crisis? Maybe. Have you ever wondered what makes a good plan and how you arrived at the decision? Did you look outside the box or follow someone else’s lead? Analyzing the psychological foundations of business strategies is not a new concept, but probably one that’s not really thought about. Giovanni Gavetti, an associate professor of strategy at Tuck School of Business at Dartmouth College, says that it’s the opportunities that are “cognitively distant” from one’s typical experience that are most potentially rewarding, and that companies tend to gravitate toward only a few profitable opportunities, which can quickly “dry up the well.”
Lesson to be learned: Expand your resources
With that in mind, let’s get back to finance.
The Term That Won't Go Away
‘Liquidity crisis’ (did you guess the term?) seems to keep popping up. And rightfully so. Between inflation, fluctuating interest rates, a possible recession, and the economy overall, financial institutions have a right to be concerned about keeping up with consumer demand. What are you doing to mitigate these risks? Maybe our lesson from above already has you thinking.
As a reminder…
Failing to Plan is Planning to Fail
One of the worst things you can do in a liquidity crisis is wait until the last minute to react (or do nothing at all). Having a strategic plan in place is not only important but could potentially save your institution from some abysmal lows.
As a general rule of thumb, to effectively manage your business’ liquidity during economic downturns, financial institutions should:
- Measure liquidity often
- Stress test liquidity through modeling and forecasting
- Plan what tools will help to maintain and grow liquidity
Let’s say you are already measuring and stress testing and need some guidance on the plan – because if you remember, you want to expand your resources to prevent drying up any wells.
Diversify, Diversify, Diversify
And one last time for those in the back - DIVERSIFY! In order to properly diversify, a financial institution should pay special attention to the purchased loans’ risk exposures to ensure they are a different asset class than the loans in the institution’s current portfolio. One of the best ways to grow and diversify your portfolio is by introducing a second-lien whole loan program to your institution. While organic growth is falling, high-yielding second-lien loans are remaining strong and can help enhance revenue.
As an added bonus, the right whole loan solution can help keep your institution protected with benefits such as loan default insurance, provide loan data analytics, and can even be fully serviced by a third-party servicer to save you time and resources.
Home equity participation lending is an additional way to diversify your portfolio. Purchasing or participating in a pool of super prime HELOCs can grow your loan portfolio and enhance revenue with low credit risks and above-average yields. These participations tend to be flexible, help you save on time and resources, and can bring balance back to the balance sheet.
We will probably hear “liquidity crisis” a few more times this year. But, with your new-found approach to thinking outside the box and expanding your resources to help mitigate any potential risks, you will be one step ahead of your competition.