Contingent Liabilities: Three Lines of Defense for Lenders

Determining and assessing a borrower's contingent liabilities is an important step in the lending process, and one that many bankers do not fully understand. This webinar reviews the various types of contingent liabilities and the three lines of defense.

A contingent liability is a potential depends on a future event occurring or not occurring. Bankers must fully vet the adverse consequences of contingent liabilities to the financial condition of a borrower/guarantor/owner because of the risks of a potential problem loan and/or diminished support for a borrowing business or real estate project/property.

This program starts with reviewing the various types of contingent liabilities and why they are important. We then look at three "lines of defense" for determining and assessing contingent liabilities.

Lines of Defense:

  1. Full disclosure - including simple things like personal financial statement formats and other financial documents that contain clues to other contingent liabilities. 
  2. Developing a secondary or realistic liability which can emerge in the short term - going beyond the face amount of the guarantee (or other item), including: 
    • Understanding the full guarantee structure (guarantee percentage vs. ownership percentage)
    • Underlying cash flow and debt service coverage (DSC) of company or project/property as indicator of potential payment default, then any related collateral and/or reserves.
    • This section provides an assessment example using real estate projects.
  3. Understanding all related parties and the business balance sheet items among the parties
    • Various current receivables
    • Long-term or due from owners and how they arise
    • Other amounts due to owners (liabilities) and various levels or types of subordinated debt or liabilities
    • This section includes examples from financial statements and tax returns, plus issues with corporate "off balance sheet" items such as standby letters of credit and corporate guarantees.

Who Should Attend?

Commercial and business lenders, community bank lenders, private bankers, credit analysts and portfolio managers, credit officers, loan review specialists and others involved in the consumer and commercial lending process.