As I review the Federal Reserve’s recent comments on inflation, economic growth, and the broader direction of the economy, I keep coming back to one phrase: “I wish I knew.”
As senior risk leaders, our instinct is to pause, assess the facts, learn, and then take action. But in today’s environment, waiting for perfect clarity may not be an option. Doing nothing is still a decision, and often one with consequences. Our role is not to predict the future with certainty, but to prepare our institutions for a range of possible outcomes.
KEY RISK 01
Persistent Inflation and Margin Compression
- Inflationary Pressures: Inflationary pressures remain elevated with a worsening outlook. Renewed conflict in the Middle East has reversed June’s signs of easing energy costs, reintroducing pressure across multiple commercial sectors.
- Business Margins & Cash Flow: Rising input, wage, and now energy costs are compressing business margins and weakening borrower cash flow.
KEY RISK 02
Interest Rate Volatility & Policy Uncertainty
- Higher for Longer: The “higher for longer” rate environment continues to strain variable rate borrowers and upcoming rate re-sets/maturities.
- Rate Outlook: The June inflation reports provided no clear direction on near-term rate policy, and the Federal Reserve leadership transition has added further uncertainty to monetary decision making. With energy prices rising again, inflation is now moving further away from the Fed’s 2–2.5% target, delaying any downward rate adjustments. As a result, a rate increase remains a 50/50 possibility.
KEY RISK 03
Depressed Collateral Valuations & Rising Loss Severity
- Commercial Real Estate: Commercial real estate valuations continue to reset downward as capitalization rates rise and demand patterns shift.
- Property Performance: Higher operating costs, exacerbated by renewed energy price pressures, may further strain property performance, particularly in office, retail, and hospitality segments already facing occupancy and revenue challenges.
- Collateral Values: Declining collateral values push LTVs higher and increase loss severity.
FOLLOW THE DATA
CEIS Market Credit Quality Report
COMMITTEE CHECKLIST
Recommended Actions for Risk Committees
- Audit all concentrations in CRE, with specific focus on Office, MF, Rate Sensitive Loans, and CRE Construction lines.
- Run multivariable shock scenarios (e.g., +100 bps rates + 15.0% collateral decline + energy cost shock).
- Map risk tier migration to prioritize credit review and borrower outreach.
- Re-evaluate portfolio limits for new underwriting and balance sheet management
NEXT STEPS
Apply the Analysis to Your Portfolio
We welcome the opportunity to connect for a brief call to share how our stress testing approach may support your portfolio management efforts. Even if the timing is not immediate, the conversation will provide you with a useful perspective on an additional proactive way to evaluate risk within your portfolio.
This will provide you with a first-hand view of how our independently validated stress testing models can be applied to your portfolio segment, while giving CEIS Review an opportunity to discuss how the analysis may support your institution’s risk oversight and portfolio management objectives.
ABOUT THE AUTHOR
Dean Giglio
Dean Giglio is a Managing Director with CEIS Review responsible for Stress Testing and related engagements for CEIS’ client base. A Senior Level Credit Risk professional with over 40 years of Risk Management experience in areas such as middle market portfolio management, senior level credit decisioning, structuring and managing portfolio data reporting, credit risk management – namely, risk rating determination, regulatory classifications, and special assets credit structuring. Over the last 10 years with CEIS, Dean has completed over 125 stress tests on CEIS clients with customized approaches to fit each institution’s need.
