Magazine article American Banker

Delinquency Statistics Understate the Risks

Magazine article American Banker

Delinquency Statistics Understate the Risks

Article excerpt

There are many reasons for bankers to celebrate what has been over all a solid year for their industry.

Even though interest rates have been rising and margins compressing, banks have been quite profitable. And if we get through this quarter we will have gone 18 months without a bank failure in the United States. That has not happened before in the entire time the FDIC has been keeping records, starting in 1934.

However, at the risk of sounding like the Grinch who stole Christmas, 'tis the season to be cautious. There are plenty of reasons not to become complacent. Times are much more perilous for bankers than the current delinquency data shows.

Let me suggest some areas that may need fixing, and some ways to fix them.

* The very fact that we are at a low point of bank failures and loan delinquencies should give us all pause. Things cannot get much better on these fronts. And, with loan-loss reserves worked down at most banks to bare-bones minimums, we should be preparing for the inevitable rise in problematic metrics.

We should identify areas in our portfolios where we are most vulnerable -- whole-loan sales, credit default swaps, etc. -- and look for ways to control that exposure.

Bankers accustomed to selling loans should make sure that residuals are properly valued and that sales terms have been sufficiently clear and fair that lawyers for loan purchasers do not come back and take a bite out of the bank.

We should be prepared for downgrades from credit-review officers and take whatever writedowns we have to early so that we can move on.

* Regulators will continue to scrutinize AML/BSA, corporate governance, and compliance, and we should be prepared to keep making improvements in these areas. Bankers who do not may find their M&A wings clipped for quite a time by their regulator.

* Bankers with serious exposure to consumer business should be especially cautious. The personal savings rate has not been in positive territory in seven months -- we have not seen a negative personal savings rate since the Depression. Consumers are piling debt on the back of housing values that will not continue to rise forever. The government is also running huge deficits. The lack of savings in the United States cannot go on forever either.

* Also unusual is the low-volatility, flat-yield-curve environment we are living through. Fixed-income-options volatility, an indicator of market volatility, is at the lowest point in a decade. Moreover, the spread between two- and 10-year Treasury bonds is lower than at any time in almost five years. In fact, the front end of the yield curve is now inverted, with two- and three-year Treasury bonds paying higher yields than five-year bonds.

We have not seen an inverted yield curve since mid-2000. …

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