Consumer Banks to Focus on Credit Risk in 2009: Analyst

Banks will no longer be lending the way they have in the past, offering primarily very simple products and focusing sharply on credit risk in 2009, according to a banking analyst.

“The banks are still struggling and credit markets are still tight; funding growth won’t be easy, even with the recent capital infusion,” said Kathleen Khirallah, managing director of TowerGroup’s banking practice. “The business model will change in consumer lending. There will be a radical departure from the lending practices of the past. Banks will focus on how to become more efficient, on making sure their business model is right and how to prepare for the long road back. Lending won’t be as impacted in the future as it is today.”

Khirallah made her comments on a Webcast facilitated by financial services research firm TowerGroup titled “Top Trends in Consumer Banking: What to Expect in 2009.”

She added that beyond focusing on credit quality risk and appropriate risk pricing for their own financial survival in 2009, financial institutions are likely to be under more regulatory pressure to do so. With a new President and several other new legislators taking office next year, they will likely consider regulations to have tighter oversight of financial institution lending.

The new legislators will also have some impact on the newly-created $700 billion Troubled Asset Relief Program (TARP), which has yet to have any positive impact on lending, according to Khirallah. “Regulators are concerned about the access to credit markets [but] retail bankers are waiting for the dust to settle with regulators, the government and consumers.

“Credit risk will be a top priority in 2009,” Khirallah adds. “There’s a real concern about how capital will be used in 2009. Many banks will be focused on that.”

Therefore, Khirallah expects financial institutions to add technologies that will enable them to better manage risk.