Magazine article The Journal of Lending & Credit Risk Management

Ensuring That More Than ROE and ROA Define the Leader of the Pack

Magazine article The Journal of Lending & Credit Risk Management

Ensuring That More Than ROE and ROA Define the Leader of the Pack

Article excerpt

I read with great interest about the recent appointment of a Blue Ribbon panel to study regulatory disclosure by financial institutions--a joint effort, in fact, among regulators and the financial services industry. We should all applaud this collaboration.

The effort reminds me of the derivatives study completed several years ago by the Group of 30. The financial services industry, responding to congressional saber rattling, produced an excellent roadmap designed to guide institutions on managing the risk of financial instruments. One can only shudder when contemplating the guidance the "experts" on Capitol Hill would have offered if we had not acted at our own behest.

I have long felt that the lack of enough honest, in-depth disclosure has hurt many well-run banks and forestalled the departure of many that are not. My conviction tracks with my philosophy: For those who haven't done anything wrong, there's no reason to worry.

Currently, the market has little information with which to compare the risk of one institution with another. Consequently, the company that produces the highest ROE or ROA becomes the standard by which all others are judged. No matter that the leader of the pack may someday collapse under the weight of reckless risk taking.

I can think of several items that would immediately help investors better determine who is producing the right return for the risk taken. They include:

* The distribution of a company's loan portfolio by probabilities of default and loss given default (see RMA's response to the Basel proposal).

* Value at risk calculations (VaR) in treasury and capital markets operations. …

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