When uncertainty becomes the norm rather than the exception, risk management has to evolve with it.
As we discussed in Part 1 of this series, Lending in the Age of Uncertainty: How Geopolitics is Reshaping Commercial Loans, global instability continues to influence local lending conditions. Now, a new challenge is testing the resilience of financial institutions: the ongoing federal government shutdown.
Understanding the Impact of Furloughs
Federal furloughs have created financial strain for thousands of government employees, many of whom have already missed at least one paycheck, and face the possibility of further delays. For lenders, the immediate concern is the potential rise in delinquencies, particularly in regions with high concentrations of federal workers.
But the impact doesn’t stop there. When households lose income, they reduce spending. That slowdown trickles through local economies, hurting small businesses that rely on consistent consumer activity such as restaurants, service providers, retail shops, and others. The result? A broader increase in loan risk across both consumer and commercial portfolios.
Identifying Concentrations of Risk
Now is the time for lenders to take a closer look at their portfolios and identify areas of heightened exposure. Consider:
- Do you have borrowers concentrated in regions with large federal workforces?
- Are there significant loans to government contractors whose revenue depends on timely federal payments?
- Are local businesses, particularly those near federal offices, reliant on government employees for their customer base?
Understanding these concentrations helps financial institutions anticipate potential credit deterioration and act before payment problems emerge.
Proper Classification, Oversight, & Review
In periods of prolonged shutdown or economic stress, loan classification and monitoring practices become more important than ever. Banks should review and, if necessary, reclassify loans that could be affected by reduced government spending or lost household income.
This could mean downgrading commercial relationships if early warning signs appear. For example:
- A restaurant located near a shuttered federal building with declining revenue.
- A small government contractor facing delayed contract payments.
- A consumer borrower missing payments due to loss of federal income.
Ongoing review processes should include targeted analysis of repayment capacity, liquidity, and borrower communication. Documentation of risk assessments and any proactive outreach efforts will be critical as examiners and auditors look for evidence of sound oversight.
Beyond the 2019 Playbook
It might be tempting to compare today’s shutdown to 2019, but that would be a mistake. The current environment is more strained, with elevated inflation, higher costs of living, and persistent economic uncertainty. What might have been a temporary slowdown six years ago could now have deeper and more lasting effects.
Lenders should be cautious about relying solely on historical data to predict performance. Instead, apply forward-looking stress testing and scenario analysis to evaluate how long borrowers can withstand income disruptions or reduced cash flow.
A Broader Economic Strain
Even if the shutdown is temporary, the ripple effects could compound existing pressures in the economy. Rising energy and grocery prices, ongoing supply chain challenges, and broader geopolitical uncertainty are already testing borrowers’ financial resilience. For many, a missed paycheck or delayed payment can quickly shift from a short-term inconvenience to a long-term financial hardship.
What This Means for Lenders
As the shutdown continues, lenders should focus on proactive risk management strategies to protect their portfolios and support borrowers:
- Assess geographic exposure to federal employees and government contractors.
- Reevaluate loan classifications for potentially impacted borrowers and industries.
- Increase monitoring frequency on loans showing early warning signs of stress.
- Engage borrowers early to explore temporary relief or restructuring options where appropriate.
- Document oversight decisions to demonstrate prudent risk management practices.
The federal shutdown is a reminder that even local portfolios are not immune to national events. Lenders must focus on mitigating losses, maintaining regulatory confidence, and strengthening relationships with borrowers who are navigating an uncertain financial landscape.
If you need further guidance or have any questions on this topic, we are here to help. Please do not hesitate to reach out to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.
