Between an impending recession and runs on several regional banks, a greater need for workout professionals is taking hold in the banking sector, which will cause many institutions to adapt how they staff their special assets groups.

By Charlie Perer, Head of Originations, SG Credit Partners

“Adaptation” is a 2002 comedy-drama starring Nicholas Cage. The movie is about a screenwriter who is finding it difficult to adapt a complex book into a movie. Similar to Cage’s character, banking executives are struggling with their own ability to adapt their personnel structures to today’s increasing turbulent economic environment, especially when trying to plan staffing for special assets groups.

Currently, many commercial banks are experimenting or instituting a new flex model, based on military reserve strategy, to be able to flex up and down their special assets groups. The past few years has illustrated the need for both skeleton crews in good times and large groups of capable credit-trained bankers who are able to deal with challenged credits in bad times. Banks can never truly be prepared for a Great Depression-style run, nor should they be, but they can plan scenarios for various levels of criticized assets whether it they be due to industry-specific events, such as recent shocks in oil and gas, or a deep recession to the overall economy. These myriad scenario plans have led to the new flex model approach from at least some of the big banks.

Of course, no scenario planning could have predicted COVID-19 or the potential of a shutdown, not to mention defaults if the government did not step in. The month prior to passage of the Paycheck Protection Program, banks were scrambling to enlist everyone able to be prepared to start working out loans. A few months later, the same executives who were preparing for mass defaults had to pivot to send everyone back to the line to deal with billions of deposit inflows thanks to the PPP. Within a period of 60 to 90 days, bank executives went from having skeleton crews of workout folks to drafting everyone able to fill in the ranks back to skeleton crews. This exercise inspired many of the United States’ largest banks to create a flex or reserve program, similar to the military reserves, so employees could be ready switch roles within their respective banks. Just imagine how many experienced special assets group (SAG) officers are remaining who cut their teeth during the 2008 financial crisis and what that would have meant if the government did not intervene in the wake of the COVID-19 pandemic. This is why banks are continuing to think through how to have a reserve system in place with pre-identified bankers who can be quickly drafted.

This group of pre-identified bankers will be prepared to join special assets groups full-time upon any event that creates significant credit downgrades. The impending recession and potential credit issues caused by the recent regional bank runs will probably test this new SAG flex model. The core SAG teams across big banks are all understaffed to handle a black swan event similar to the COVID-19 pandemic or another run-on-the-banks scare. However, they are capable of helping to supervise newly enlisted bankers who will be trusted to handle many cases.

Since special assets groups are typically small to begin with and the economy as generally been strong since the Great Recession, there are few other alternatives to this flex model. We are about 15 years removed from the last real shock to the system and most experienced workout and credit folks are now retired or are thinking about. A 50-year-old workout executive in 2008 is now 65, so the idea of entering the trenches for a new cycle is either exhilarating or exhausting.

While the flex system is the logical model, it does come with risks. The core workout teams at the biggest banks have average tenure of 10-plus years and have seen their fair share of rodeos, both good and bad ones. The workout sector uses an apprenticeship model that takes years of learning to master no matter how good of a lender someone is.

As we continue to hurdle toward recession, there are going to be a large number of new bankers thrown in quickly in what is poised to be a very difficult time, with many business owners themselves put in adverse positions. This is the time when someone who is cut out for special assets is going to actually be tested.  The profession is a unique blend of business, law and psychology and not meant for everyone.

The end of “Adaptation” is pure Hollywood, as Cage’s character discovers the true story behind the book’s narrative and in turn comes up with his own adaptation. Somewhat similarly, banks are coming up with their own “adaptations” to deal whatever predictable and unpredictable events are thrown at them. The flex system is a novel approach and a great way to recruit life-long SAG executives., and it’s in times like these that you find out whose adaptable for workouts.