Academic journal article ABA Banking Journal

Turning Lemons into Lemonade: Selling Classified Assets to Improve Loan Portfolio Performance

Academic journal article ABA Banking Journal

Turning Lemons into Lemonade: Selling Classified Assets to Improve Loan Portfolio Performance

Article excerpt

Classified assets have increased steadily in recent years--especially for community banks. According to the Federal Reserve Board, classified assets rose to 9.3 percent of total loan commitments in 2003, the highest level since peaking in the early 1990's. Industry experts attribute the alarming increase in sub-performing debt to aggressive loan growth, an increase in high-risk portfolios, and a lack of optimal credit policy controls.

[GRAPHIC OMITTED]

The consequences of carrying a higher percentage of classified assets on bank balance sheets include declining asset quality ratios, higher levels of restricted capital for loan loss reserves and diminished regulator and investor confidence.

A typical response of banks to increased classified asset ratios is to tighten their credit policies in the hope of improving their ratios over time. Unfortunately, credit underwriting is an imperfect science and tighter credit policies will cause banks to reject many good loans in the process.

Fortunately there is an alternative to tightening credit decisions in order to improve asset quality ratios--loan sales.

The Solution: Sell Your Classified Assets

Selling classified loans will remove the adversely, rated loan and potential liability from the balance sheet, relieving the bank of the risks associated with such sub-standard assets. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.