Credit Risk Management Trend: Policing Whole Loan Portfolios
Ben-Amos, Omri, American Banker
Bankers are looking to loan portfolio management techniques, such as syndications, both to reduce losses and to mitigate their effect on bank earnings, speakers at a Robert Morris Associates conference said.
Preliminary findings of a new risk management survey among 64 banks with assets of more than $5 billion showed that 59% now practice some form of active portfolio management, said Robert Zizka, a consultant at First Manhattan Consulting Group, which analyzed the survey for RMA.
These banks use a host of strategies and techniques to manage or adjust their exposure after credits are booked, he said. Indeed, the RMA survey found that, while only 24% of banks now use syndications to manage their corporate loan portfolios, 57% in the survey expect to use it often by 1999.
But 41% of the institutions surveyed did little if any grooming of their wholesale loan portfolios, sticking to the traditional pattern of lend-and-hold, according to Mr. Zizka.
"The historic solution to losses has been the execution of the senior credit officer," said Robert S. Strong, executive vice president and chief credit officer at Chase Manhattan Corp.
However, active portfolio management can help banks avoid the "double whammy" of large losses and the resulting earnings fluctuations that harm banks' share prices, he added.
Active portfolio management encompasses a wide array of both new and old tools and structures, such as advanced risk analysis and classification of individual loans, loan syndications and trading, use of credit derivatives, and geographic and industry diversification.
David G. Gibbons, the Office of the Comptroller of the Currency's new deputy comptroller for credit risk, endorsed thinking about whole portfolios but warned against losing sight of "the fundamentals of credit risk management."
"We are not convinced that past miscues were the result of obsolete risk management concepts," he said at a Robert Morris portfolio management conference Wednesday in New York. "Rather, we feel they resulted from a failure to practice the effective risk management principals of the day. …