ABA Banking Journal - January 2008 - (Page 10) briefing credit risk part of risk-weighted assets by allocating assets and off-balance-sheet exposures among a fixed set of risk weights. The Standardized Approach differs by recognizing that different counterparties within the same credit category can present different risk profiles. It offers lower risk weights for: consumer and small business loans (in a well-diversified portfolio); prudently underwritten residential, multi-family, and commercial mortgages; and securities, loans, and guarantees from other banks, states, municipalities, and government-sponsored enterprises. Credits and other exposures to corporations are riskweighted, based on rating agency ratings. Off-balance-sheet items are treated as under Basel I, but with the relevant exposure risk-weighted by the new rules. An important add-on is a capital charge for operational risk. While this charge can be computed fairly simply as a fraction of net gross income, it remains to be seen whether the net result of the Standardized Approach allows banks with strong portfolios to reduce capital with minimal additional reporting burdens. capital regime that more accurately aligns regulatory capital with risk. To this end, a menu of capital options is appealing. It gives all banks flexibility to choose among capital rules that suit their business needs and risk profiles. Yet, it is important to minimize competitive inequalities that may result from different capital regimes. The regulators have promised to vigilantly watch for such inequalities, including a study in 2010, before the large banks fully implement the Advanced Approach in 2012. Bankers and ABA will need to carefully review the forthcoming Standardized Approach to ensure these goals are met. BJ Outlook for regulatory changes Bankers and ABA certainly support the development of a workable risked-based Snapshot C&D asset quality takes a hit O ne of the secondary impacts of the housing market crunch is predicted to be a similar pullback in construction and land development (C&D) lending. This lending segment includes the building of new homes and commercial developments, as well as alterations to existing structures. Intuitively this relationship makes sense. If there is a glut of homes on the market, building more does not improve the situation. The excess capacity would put these portfolios at higher risk for default as well. To measure the impact of the slowdown in the segment, SNL examined reported C&D loan and asset quality data aggregated at the commercial bank call report level over the last five quarters (see chart). In the aggregate, in the third quarter of 2003 C&D loans grew 15% on a year-over-year basis, half of the year-ago growth rate. At the same time the ratio of C&D loans 30 to 80 days past due and accruing interest to total C&D loans grew from 72 to 128 basis points; C&D Loans 90+ days past due and still accruing interest more than doubled; and C&D loans on nonaccrual status more than tripled. At the state level, Florida saw nonaccruing C&D loans grow by over 900% on a year-over-year basis, from $52 million to $526 million. Contrasting this is Texas, which grew a relatively modest 36%, from $55 million to $75M. The Midwest market has been one of the hardest hit, with nonaccruals growing year-over-year by 198% in Ohio, growing from $276 to $823 million, and roughly 520% in Michigan, from $87 to $538 million. The results are not good for the near-term outlook of the segment. In general, look for this trend to continue into 2008, with an early year plateau leading to a gradual improvement as the market sorts itself out, with geographic region playing a significant factor in recovery time. —John McCune, SNL Financial jmccune@snl.com Construction and land development lending U.S. commercial banks C&D Loans Aggregate ($mil) Y-Y growth (%) C&D loans 30 - 89 days past due and still accruing interest Aggregate ($mil) Agg/total C&D loans (%) C&D loans 90+ days past due and still accruing interest Aggregate ($mil) Agg/total C&D loans (%) C&D loans on nonaccrual status Aggregate ($mil) Agg/total C&D loans (%) Source: SNL Financial 2007 Q3 2007 Q2 2007 Q1 2006 Q4 2006 Q3 547,709 15.18 533,048 18.33 515,674 22.02 498,483 27.31 475,516 30.82 7,016 1.28 5,382 1.01 5,449 1.06 4,425 0.89 3,407 0.72 1,160 0.21 759 0.14 685 0.13 532 0.11 427 0.09 8,506 1.55 5,891 1.11 4,007 0.78 2,855 0.57 2,039 0.43 10 JANUARY 2008/ABA BANKING JOURNAL www.ababj.com/subscribe.html http://www.snl.com http://www.snl.com http://www.ababj.com/subscribe.html
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