Tag: Credit Risk

Your Bank Probably Has Loan Size and Risk Wrong

Managing Credit Risk
MANAGING CREDIT RISK

If you are like most banks you have your credit approval and risk process based around loan size. The assumption is that the larger the loan the more risk the bank is taking on so a greater level of risk review is needed. But, suppose the data didn’t bear that assumption out? If that assumption is wrong, then that means that your bank is probably underpricing the smaller loans, overpricing the larger loans, applying the wrong cost structure to the larger loans and misaligning risk against your capital.

Why The Next Quarter is Important For Lenders

Managing Loan Growth

The last quarter in the year is typically a suboptimal time to generate commercial loans.  Most bankers have met their annual goals factoring the existing pipeline of credits. Furthermore, banks that have not met their goals for the year are likely to price and structure more aggressively, thereby depressing profitable opportunities for more disciplined lenders.

How To Avoid Structural Subordination In Commercial Bank Lending

INADVERTENT CREDIT RISK
INADVERTENT CREDIT RISK

Too many banks in the last financial crises fundamentally misunderstood or did not pay attention to structural subordination risk.  We feel that this pattern is partially repeating at some banks today.  Further, most banks overestimate the amount of credit support that can be recognized across corporate entities and individual sponsors, and this leads to misguided lending practices.  We want to explain where banks can buttress their credit underwriting when dealing w

What Commercial Loan Covenants Matter For Banks

Managing Lending Risk Through Loan Covenants
MANAGING LENDING RISK

We are not sure when the first signs of a credit shock will appear, but it is coming. When it does, it will be the presence of commercial loan covenants that give banks a competitive advantage of using covenant violations to pressure borrowers so that banks can improve their risk position.

Does Loan Amortization Matter? [Plus Free Calculator]

How structure impacts credit
HOW LOAN STRUCTURE IMPACTS CREDIT

Sometimes how we choose to measure something can lead to incorrect conclusions. While mathematically 30 is 50% more than 20, a 30-year amortizing loan is not 50% riskier, or 50% longer than a 20-year amortizing loan. The amortization term is often a poor measure for bankers to use to make credit decisions.  In this blog, we will explain why the amortization term can be a misleading measure, why bankers should be using average life, and we will provide readers with a downloadable average life excel calculator for bankers to use for their own analysis.

The Status of Commercial Real Estate Values

Commercial Real Estate
CRE UNDERWRITING

Recent data, just released from Real Capital Analytics, shows that since the start of the year (month-end April), commercial real estate (CRE) has appreciated 2.6% in 2019. This is good news for banks as it shows that every significant loan sector likely has improvements in both debt service coverage and loan-to-value. In major markets, this appreciation has been closer to 4.9%, and in secondary markets, price appreciation has been 1.5%. In this article, we take a look at the details to help banks better manage their pricing and risk.

 

How Understanding Loan Demand and Credit Quality Will Make You A Better Banker

Managing Credit Volume

A common line of thinking in the banking industry, especially regulators, is that recessions are driven by, or at least exacerbated by, the supply of credit. Banks, in an effort to stay competitive, tend to drop their lending standards to hit their loan growth targets. In doing so, these banks take on more and more risk. This occurs until the credit cycle turns, and then banks run into credit problems. However, what happens if banks are watching the wrong competitors? While surely recessions are a function of credit supply, maybe recessions have more to do with demand?

Why You Are Watching The Wrong Lending Competitors

Credit management - graphic of man looking through binoculars
CREDIT MANAGEMENT

No doubt, you hear all about how your competitors are winning deals because they are more aggressive when it comes to underwriting. While banks must always ask if they are taking the right risks and the right amount of risk, it is probably the competitors that you are not watching that is causing you the greatest risk. In this short article, we explore one often overlooked aspect of competitor surveillance and how this one technique can help protect your bank.

 

The Hidden Risk in Commercial Lending

Managing credit risk - unexpected loss
MANAGING CREDIT RISK

Most risk managers are intimately familiar with the expected loss for credit and interest rate risk. However, fewer risk managers are familiar with the concept of unexpected loss.  For commercial banks, it is the unexpected loss that is more important for lending decisions and long-term profitability.  We will outline how unexpected loss manifests itself in lending decisions and what commercial lenders must know to safeguard against unexpected loss for credit and interest rate risk.

 

The One CRE Underwriting Metric You Are Likely Not Using, But Should

More Accurate Commercial Real Estate Underwriting
More Accurate CRE Underwriting

Whenever your bank is looking at underwriting commercial real estate (CRE), you are probably looking at a variety of macro factors such as rent and occupancy trends, absorption, and capitalization rates. However, since we see hundreds of underwriting packages a month from a variety of banks across the country, it is rare that we see banks, and even borrowers, adjust rents for new construction. In this article, we present our methodology, data, and adjustment factors that banks can use to have more accurate underwriting.

 

Pages

Subscribe to Tag: Credit Risk