Tag: probability of default

The Hidden Risk in Commercial Lending

Managing credit risk - unexpected loss

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.


Why That 5Y Adjustable Rate Loan is a Bad Idea

Commercial Loan Structuring

One of the most common structures in commercial lending is that ten-year commercial loan that is structured as a five-year fixed rate loan with a rate reset at the end of five years. There are two main problems with this loan structure, one having to do with credit and the other having to do with interest rate risk that makes this one of the worst performing loan structures in a rising rate environment for community banks. In this article, we delve into the data to compare two popular loan structures.


Understanding The Three Dimensions of Borrower Credit Risk

Better Borrower Underwriting

The credit quality of a borrower moves in three dimensions. The obvious dimension is, of course, credit. However, a second dimension is credit volatility or how likely that credit is set to move over time. The third dimension is credit selection risk or the risk that your underwriting isn’t accurate. Selection risk can be thought of as underwriting error. Some industries and some borrowers are more complex than others, and the risk that your bank determines the loan as a low credit risk while it is high or vice versa can be quantified.

Community Bank Commercial Loan Default Rates – Current and Projections

Quantified Lending Risk

We analyzed default rates through 2015 for banks between $300mm and $3B in asset size.  Historical default rates were measured and analyzed for various loan categories for this bank set.  We also reviewed Moody’s Investor Services corporate default and recovery rates through 2015 and considered which industries may present opportunities for community banks from a yield/risk perspective and as a way to diversify from real estate concentrations. 


Understanding A Bank Loan’s Debt Service And Probability Of Default (2015)

Commercial Loan Probability of Default

Few banking school classes teach the finer points of loan structuring these days. This is a mistake as loan production is so competitive and spreads so thin that inexperienced lenders are at a distinct disadvantage. Last week, for example, we were discussing a loan here at CenterState and we determined the downside (stressed) case in a particular commercial real estate loan’s cash flows was a 0.8x debt service coverage ratio (DSCR). The question came up how much risk is that compared to a loan that cash flows at 1.25x stressed case?

CRE Retail: Does This Tenant Make My Butt Look Fat?

Retail CRE Analysis

A couple years ago, I wanted to see what the “New JC Penney” looked like so we took a stroll through one at the local mall. While I was intrigued with the concept of doing away with sale prices, wider aisles and easier to read signs, the wife doubted if not having sales would work – “people love sales,” she said.

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