Risk parity is a portfolio allocation strategy that that every bank manager should understand because the concepts are key to understanding how a bank constructs both its balance sheet and its credit portfolio.
Tag: Asset Allocation
Next to C&I, commercial real estate ("CRE") loans have been one of the best performing asset classes for banks in 2014. Spreads continue to tighten on CRE and are expected to suck in another 8bp by year end making the future look bright. With banks coming up on their mid-year asset allocation review, all looks stable for the majority of bank asset classes with the exception of the difference between commercial real estate and residential mortgage holdings on bank’s balance sheet.
There is a classic debate in banking of whether it is better to diversify your loan portfolio or to “stick to what you know.” The logic of the stick-to-what-you-know camp is that since you understand X (insert your specialty – real estate, doctors, residential, etc.) your return will offset any gains in diversification.