Football coaches, like bankers, often ignore the data. Take 4th down conversions for example. We see this week after week where college and NFL coaches punt or kick a field goal where statistics indicate that they should go for it. Look at the chart below and you can see that coaches normally don’t go for a 4th down conversion (by a factor of more than 5) unless they are put in a situation where they have to, usually in the 4th quarter. Statistically, that is odd.
Tag: risk management
Is there an advantage to banks in diversifying loan portfolios by geography and category? As we learned in the downturn, geography can have a huge negative impact on banks. In fact, geography is the largest single factor driving profitability (largely due to credit performance) composing about 16% of a bank’s return.
The “Internet of Things” is well on its way of changing how we move around the physical world, and 2014 marks the first time banks are starting to capitalize off this trend. Manufacturers are embedding sensors, tracking devices and actuators in various devices and linking them via the Internet. These devices form a network that not only churn out a steady stream of raw and analyzed data, but are able to be communicated with. The result is a “dynamic information layer” that adds value to any activity touching this network, including bank financing.
If you listen to the news pundits, there is lots of talk about asset bubbles. To figure out if banks are lending into inflated asset prices we turn to the data for answers. Since valuation is a function of future cash flow, having a more accurate vision of the future is helpful when lending. Once predictive factor to alert commercial real estate lenders is when supply outstrips demand by more than a 2-to-1 ratio. When this occurs there is better than a 60% chance that cash flow remains flat or even goes down, thereby hurting property values.
The risk of being an officer or a director at a bank is huge compared to other industries. How well does your D&O (director and officer insurance) protect you against the FDIC? If there ever was a time to perform a risk check the time would be now, as case law and legal actions are now rich in current precedence. While insurance policies have improved, not all of them have and many banks are still exposed.
It was the day after Christmas in 1919 when the Boston Red Sox transferred George Herman Ruth to the NY Yankees for the princely sum of $25,000. While this might have started the 86-year Curse of the Bambino for the Sox, the Yankees leveraged the Babe to their advantage. In the contract, in addition to the Babe’s $5,000 salary, the team inserted the language to pay Ruth $50 for each home run. It was a simple sentence that changed the whole game of baseball.
You can ignore banking law, but it is a life force that is always around us, everywhere, all the time – just like Ryan Seacrest. Similar to that hard working celeb, banking law, particularly as it pertains to commercial lending, really came into its own during the downturn. It seemed like every loan had an issue.
Sometimes, a company or real estate project with higher debt levels means less risk, not more. This concept is counterintuitive as credit underwriters have been historically taught that more debt means higher risk. However, the statistical evidence does not bear this out.
In this age of enterprise risk management, a new product or process risk assessment is mandatory. A good risk assessment looks at any new effort from a variety of angles and tries to quantify the unmitigated risk. While a risk assessment is an important step in protecting current operations, it is also the place to understand the opportunity cost of not offering the product and the potential revenue that the new effort or procedure will bring to the Bank.