Is the wolf finally here?

For the last five years, I have been in conversations with many lenders about downturn and recession preparedness. So, to date, the recession hasn’t materialized.  Is that about to change?

As a former chief credit officer with over two decades of experience from Capital One, AQN and KeyBank, I’ve heard this question more often than I would have liked. Often, it’s just the risk management folks talking to themselves.  Sometimes it’s an existential question.

It seems the consumer loss bubble has always been six months away, and maybe it still is. Recent backward-looking economic data is pretty good. Hiring was a bit better than expected last month.  Unemployment is still low overall.  Inflation is persistent but well down from recent highs.  Real wages have been rising for some time.

When the coronavirus hit in 2020, I wrote a piece cautioning lenders to cut back massively. It turned out that I was entirely wrong. Despite the data we had, an unexpected massive government stimulus brought consumer losses to the lowest level since the shadow of the Great Recession.  

Since then, losses have crept up. Never dramatically, but many lenders now see delinquencies 30-50 percent higher than they were in 2021. That’s a big increase, but it took four years to get there. People were able to adjust.

In the last few quarters, things have actually started to stabilize and improve.  As inflation moderated and wages continued to increase with solid employment, consumer debt to income began to fall, albeit slightly.

So are we just crying wolf again?

Maybe.

It’s hard not to live in a cave and think that things might be turning for the worse. Job losses are up, the market is way down and inflation seems set for a resurgence. The introduction of tariffs has the market in flux, and they appear that theymight be here to stay.  As of this writing on April 7th, 2025 the pace of economic change is dizzying, so I won’t spend a ton of time on specific numbers. I think there is a clear case that forward expectations are much worse than they were a month ago.

The calls I have with lenders these days turn to recession planning more than they have at any time since 2020. We may all be just crying wolf again, but someday a wolf will show up.

You’re never going to regret having a recession plan in place. One thing about being in the lending business is that you’ll never be able to know if a potential customer will be impacted by economic factors. You have to play the averages.  In a state of ‘wait and see’, don’t extend new credit if you don’t need to be. Establish a more rigorous approval process as you monitor the situation. There’s a competitive advantage to knowing how to judge good lending from bad lending in an constantly changing economy.

You will regret waiting for the data to tell you to put a plan in place.

How can you be ready?

The real answer is, of course, too long and for a blog post and too dependent on the individual lender situation. But no matter your situation there are foundational steps you can take to develop a plan.  

Start with this question: If you knew that losses were going to be substantially higher in the second half of 2025, what would you do today?  

I’d recommend internalizing that your existing loans are what they are. That money is out on the street. You should plan for extra collections capacity (before your competitors hoover it all up), and if the loans are revolving, you have some levers, but you can’t rechoose the borrowers.

There’s more leverage in the front book. Sit down and consider: who are you taking on now, and if you knew losses were going to be higher, would you still lend to them?

Pulling back slows growth and has opportunity cost. Have you measured the tradeoff? I like looking at multiple origination policies with and without stress scenarios. To make explicit the risk you’re taking on versus the opportunities that you could be giving up.

And, of course, think about whether your P/L, balance sheet and funding strategy are at risk of different levels of loss increase.  Even if your book is horizontally profitable, you still need to ride several quarters of stress with higher losses and reserves.  Think about what you might do if current funding is unavailable or suddenly becomes more expensive.

It’s never too early to have a plan. If you already have one, this might be a good time to dust it off and freshen it up. If I were still a chief credit officer, I would.

And if you want to talk more about it, give me and LF Partners a call. We have weathered many economic storms. Those who are prepared for when the wolf arrives will be best positioned against competitors when it heads back into the woods.