The Risk Metrics Bankers are Tracking as the Economy Reopens

Bankers keep a close watch on the metrics they believe can provide them important information about the economy. However, the pandemic, the shutdowns, and then the slow reopening of the economy have resulted in changes in the types of risk metrics that bankers are interested in. Bankers are now choosing metrics that are more well suited to the current economic realities.

What Makes a Metric Suitable?

Risk metrics are chosen because they can provide insights into historical performance and provide insight into the future of the economy. Under normal circumstances, before the pandemic, banks wanted to see how the different sectors of the economy were performing. They were mainly looking at economic activities and investment-related metrics. These metrics provided great insights into how businesses were performing and the confidence that consumers had on the economy. However, what made these metrics unsuitable for 2020 is that they were tracking economic activities under normal economic cycles.

The pandemic and the ensuing shutdowns are an unprecedented event. The pandemic has changed the factors that affect economic performance and has affected different parts of the economy in a different manner. While some businesses saw a drastic reduction in revenue streams, others benefited from the shutdowns. Businesses which required in-person attendance by consumers could not operate in the shutdown – which is why the fitness, entertainment, and hospitality industries were impacted negatively by the pandemic.

On the other hand, businesses that primarily dealt in e-commerce saw an increase in their revenue streams, as even the customers who preferred brick and mortar stores had to resort to online purchases. Businesses that dealt in teleconferencing and communication technologies also saw an increase in sales and valuations, because their services proved to be critical during the shutdowns.

The best risk metrics have always been the ones that could highlight important changes in the economy. As the national and local economies slowly reopen, it is critical for bankers to see how the reopening is progressing so they can plan for risk mitigation and potential opportunities.

Risk Metrics for 2020 and Beyond

Bankers are now keeping track of risk metrics that help provide insight into risk in today’s and tomorrow’s economy. This means choosing leading indicators that can tell bankers about further economic activity down the line. Housing starts is a good example of a metric that was generally important for mortgage bankers but has now become key for bankers in all domains. The number of new houses being built can inform bankers about how confident consumers are in the economy and it can also indicate that there will be a flurry of economic activity in the coming months, as new house owners make a lot of purchases and require a lot of services to settle into the house.

Similarly, new business startups are also being tracked by bankers. There are several different things that can be learned by tracking new business startups. At the macro level, these startups show that business owners are feeling confident about the economy. Investors tend to do a lot of research before providing funding for businesses. An increase in business startups thus means that the research is showing signs of economic growth. This metric is also incredibly helpful when we look at the microeconomic level, as banks can track which industries are seeing the most business startups. This can indicate the best performing (and the worst performing) sectors of the economy. This information is incredibly important, as knowing which sectors are bouncing back from the pandemic at a faster pace can help the bank with its own investments.

The biggest question that most banks and business owners have right now is when the economy will return to “normal”. What makes this question difficult is that different states have responded to the pandemic differently – there is no shutdown by the federal government. Thus, smaller banks need better insights and predictions about local economies. Small and mid-sized banks are now focusing on generating the data they need by tracking the most important risk metrics themselves.

360factors will be presenting a webinar The Top 7 Strategic Risk Metrics Your Board Needs for 2021 and Beyond on September 15, 2020. Sign up for or view this webinar for an in-depth discussion of the most important strategic metrics for bankers across the country.