Tag: Expected Loss

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.

 

Understanding Liquidation Timing To Limit Loan Losses

Bank Loan Loss Timing

When it comes to dealing with commercial property, understanding the timing of liquidation in relationship to a loan’s maturity and the time of default is important on several levels. Knowing the data allows banks to make better loan pricing and loan workout decisions. For example, loss severity is greater for loans with 75% loan-to-value (LTV) than with 100% LTV. This is counterintuitive but can be accounted for by understanding that bankers move faster to liquidate properties that have higher LTVs.

Pricing Bank Loans For Default Volatility

Controlling Lending Risk

If you got past the title it is likely that you care about the accuracy of your loan pricing more than the average banker. Banks have long ignored the variability around default risk and it is starting to be a problem, as with tighter spreads, there is now less room for error. While bankers solve for credit risk through taking loan loss reserves and through pricing, it is rare that a community banks takes into account default variability. Many large banks do and this article shows how community banks can gain about 80% accuracy through a simple methodology.

The Latest Data On Commercial Lending Risk In Retail

Lending Risk On Retail CRE

Introduced in 1937 in an Oklahoma Humpty Dumpty supermarket, the shopping cart has proven to increase per person sales and extend shopping time. A boost to many retail establishments, it is often said to be a predictor of retail health. More shopping cart sales equals more store openings. The problem is that sales are slowing. This is germane to banks as commercial real estate exposure related to retail property financing composes an estimated 22% of community bank commercial real estate (to also include mixed use).

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