Magazine article American Banker

Weekly Wrap: Are Easing Credit Standards a Race to the Bottom?

Magazine article American Banker

Weekly Wrap: Are Easing Credit Standards a Race to the Bottom?

Article excerpt

Downward Spiral: There's a simple reason why bankers take on too much risk even when their actions come back to bite them, according to consultant J.V. Rizzi: natural self-interest. Rizzi argues that easing credit standards in pursuit of profits is a rational choice right up until the bottom falls out from the market. Regulators should accept this reality and develop strategies for containing the fallout from inevitable crises, he says. The column prompted a spirited debate among readers, some of whom argued that a broad shift toward easier credit could be a good thing. "As more banks lower their credit standards, that risk gets distributed," writes "lsphila76." Commenter "masaccio" pointed out that it's safe enough to loosen underwriting standards if requirements were too strict to begin with; it's only dangerous if "the new normal for borrowers is poor pay, few assets and massive needs for borrowing." Another reader argued that with the right policies in place, investors can provide market discipline: "Improve the sensitivity of this side of the bank ledger, and you improve the incentives for more prudent underwriting by bank loan officers."

Banking's Makeover Moment: "Cool" is hardly the first word to spring to mind when most people think of banks. But financial markets guru Chris Skinner thinks it's possible to create a financial institution that's both hip to the digital times and fair to its customers. The bank would win customers' loyalty by securing their privacy while wooing them with rewards programs and relating to them on a human level, he writes. Skinner has even come up with a memorable motto for his ideal institution: "don't screw the customer. …

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