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8/3/2019 BIS Briefing 3sf

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INSIDE BRIEFINGSnapshot: C&I asset quality a few cautionary

signals p. 8"Then & Now," a yearlong review of banking

history during ABA Banking Joumat's 100thAnniversary. This month: "In support of theGreatest Generation" p. l o

Award-winning "event concept" p. 12ABA Resources p. 15

Searchingfor newparadigmsat BISMarket turmoil has thrown VaR,nd Basel II, a curve

Bank for Internatioi idlo fcntral bankers, the implementation of theBasel 11 Capital Accord was planned as a stimu-lant to improve banks' risk management prac-ices, as well as to formulate appropriate, risk-sensi-ive capital levels for the global banking system.

Now, after building up very high expectations andnvesting enormous intellectual capital in the refor-ulation of Basel II, many bankers and regulators,

II have become orphaned bye supporters.Consider that, for the past dozen years or so, the most popu-

natural "proeyclicality." That is, banks using VaR made

director,for the Study of Financiai Market Evolution,

volatility was deceptively low. As a result, the VaR^ m techniques "should be complemented by stress test-ily ing and by basic judgmen t and simple indica tors,"the deputy general manager of the Bank for Interna-tional Settlements, Herve Hannoun, tt>ld a group ofcentral bankers meeting in Ottawa on May 8.Among the "simple indicators" to be considered,Hannoun proposed maximum loan-to-value ratiosfor mortgage loans, capital charges on structuredinvestment vehicles, leverage ratios, and dynamicprovisioning. Each of these has a precedent in one ormore national regulatory structures, he pointed out.

Three weeks later, his boss at BIS, general manager MalcolmKnight, told a meeting of international securities regulators inParis on May 29 that "risk managers must rely on a wider range oftools to capture the multi-dimensionality of risk," because "tailrisk exposures including the risk of illiquidity are not wellmeasured by simple tools such as value at risk." Despite the rela-tive rarity of losses out on the "tails" of a risk distribution, insome cases the bell-curve-shaped distribution is so flat that theactual value of losses can bankrupt banks and threaten financialmarkets. The bottom line on VaR is that it is so reliant on volatili-ty as a measure of risk, that VaR adherents missed the entire accu-mulation of risky positions since there was very low volatility.Knight recommended several corrective actions in order toreduce the risks in today's market-dependent financial system.


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neimgtransparency in the securitiza-tion chain. He criticizedmechanistic reliance on rat-ings agencies, explaining thattheir views should be supple-mented with analyses of liq-uidity and of events thatcould trigger sudden ratingschanges, especially fortranche-based instruments.Capital support should beboosted for certain products, he said, aswell as for liquidity facilities associatedwith off-balance-sheet vehicles. Similarly,event risk in trading books should beframed more carefully in bank capitalrequirements. In summation, Knightadvanced, as an overarching considera-tion, a new regulatory paradigm, by say-ing that, "The recent turmoil has high-lighted the need for better coordinationof financial regulation and supervisionacross institutions, markets, and jurisdic-tions."

Indeed, BIS officials and their centralbank members appear to have come tothe conclusion that, despite the apparentsuccess of the Federal Reserve in mone-

tizing the systemic liquiditycrisis and avoiding catastroph-ic fallout from the BearStearns crisis, the reality isthat modern financial crisesare simply too complex forany one country or centralbank to solve alone. There-fore, the central banks,through their BIS consortium,are advocating tbe benefits ota paradigm called the "macropnidential,"or macro-financial regulatory approach.

Herve Hannoun posited that "it mightbe useful for the central banking commu-nity to consider developing a macro-financial stability framework in supervi-sory and monetary pohcyniaking, as analternative to the serial bubbles that wehave experienced over the past ten years:tbe dot-com equity bubble, the housingbubble, the credit bubble and perhaps thelatest one, the comm odity price bu bble."The justification for new paradigms isrooted in widespread disappointment inthe VaR-based models. According toHannoun: "economic capital and VaRtechniques amount to transforming large

nominal amounts into very small valuat risk. This reduces tbe perceived ordof magnitude of risk exposures and giva false sense of comfort," He added thtbe recent turmoil was a reminder tb"nominal and notional amounts do mter when looking at risk exposures."

The evolving BIS perspective is nonly a backlash from the market turmoit is also a new call for evolving risk aregulatory benchmarks to support futreforms. The next generation of rmanagement systems for banks and catal adequacy systems lor their regulatmust operate in syne if the goal is to pvent tbe kind of unpleasant surprises thhave recently undermined confidencetbe global banking and credit markets.

Ultimately, these surprises seem alsohave given bankers a reason to reconsia situation in wbicb years of their inveed energies may give rise to a reformcapital regime which is still inadequfor tbe modern banking system. BJFor more on Basel II, "go to ababj.com and

look under ABABJ Biogs

SnapshotC&I asset quality a few cautionary signalsA midst all of the credit-related turmoil of the last few qu.ir-ters, the commercial and industrial {C&I} lending segmenthas been largely untouched. Recent trends, however, suggest anuptick in problem loans in the segment with the first-quarter 2008ratio of nonc urrcnt C &I loans to total C&I loans increasing by14 basis points at the national level as compared to the fourth-quarter of 2007. To get a sense for the geographic concentrationof the problem loans, SNL took a look at state-level commercialbank data aggregated from the call reports. The table shows thestates with the highest nu mbers.

NL'W Hampshire stood out with a noncurrent ratio in the C&Isegment of 5,12%, the state had previously run at around 1% to1.5%, so the uptiek was large indeed. Puerto Rico, whiie nottechnically a state, was near the top of the list with a ratio ofA.h^'Vn.. up from the prior period, but largely in-line with priorbehavior. Delaware and Minnesota also made the top of the listwith increases in the 40 basis point range on a linked-quarterbasis. The Southwest was represented with both Arizona andNew Mexico showing up on the top-ten list.

The outlook for the C&I lending segment for the rest of the

look for concentrations in areas that have experienced higher lev-els of losses in the 1 -4 family loans segments as those woes spreainto the genera! econom y of the region. Losses in the C& I category tend to have a longer tail than 1-4 family loans and upticks inthe latter are generally a precursor to upticks in the former.John McCune, SNL HKiiricw/[email protected]

Asset Quality Trends: C&I LendingU.S. commercial hanit aggregates, 10 worst-performing states in QI 2008Nonc urrent C & I Loans / Totai C & I Loans (%)*state aggregates 20O7Q1 2007q2 2007Q3 2007Q4 2008Q1New HampshirePuerto RicoAiaskaDeiawareMinnesotaNew MexicoArizonaMichiganIowaN e b r a s k aU .S .

1.212.671.641.281.401.100.340.520.971.000.61

0.944.571.321.341.410.980.740.561.091,060.61

1.493.591.331.311.421.060.520.571.290.940.63

1.713.862.191.411.251.030.631.131.211.060.64

5.124.682.841.901.601.551.461.451.371.370.78


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