Though the economy as a whole has been improving in the last few years, banks especially are still seeing the effects of the Great Recession. And for banks that were too small to be considered "Too Big to Fail," the falling interest rates and lower volume of loan applications compared to before the crisis has forced these institutions to take on more risk in order to remain solvent.
This trend was defined the U.S. Office of the Comptroller of the Currency, which announced in a risk review earlier this year that many small and midsize banks are adding riskier investments to their portfolios to reduce costs.
While both large and small banks faced difficulties after the crisis, especially considering new regulations and increased default rates, small banks do not often have the resources to bounce back like their larger counterparts.
But, as one American Banker article explained, trying other recovery measures besides simply taking on riskier investments. Small banks generally do not offer as many different types of loans as larger banks. When forced to find ways to make up for profit losses, many small banks "expanded their menu" of financial services. Since many were also forced to downsize, more banks were creating unfamiliar loans with too few or unqualified staff members, creating a greater possibility for defaults in the future.
For any financial institution, both increasing risky investments as well as adding new financial services can seem like appealing options when working to remain as profitable as before the financial crisis. When increasing the types of loans available to borrowers, financial risk management software can help small and mid-size banks avoid lending to unqualified borrowers and remain solvent in the uncertain environment.