ABA Banking Journal - July 2008 - (Page 8)

briefing transparency in the securitizatizing the systemic liquidity tion chain. He criticized crisis and avoiding catastrophmechanistic reliance on ratic fallout from the Bear ings agencies, explaining that Stearns crisis, the reality is their views should be supplethat modern financial crises mented with analyses of liqare simply too complex for uidity and of events that any one country or central could trigger sudden ratings bank to solve alone. Therechanges, especially for fore, the central banks, tranche-based instruments. Herve Hannoun, BIS through their BIS consortium, Capital support should be are advocating the benefits of boosted for certain products, he said, as a paradigm called the “macroprudential,” well as for liquidity facilities associated or macro-financial regulatory approach. with off-balance-sheet vehicles. Similarly, Herve Hannoun posited that “it might event risk in trading books should be be useful for the central banking commuframed more carefully in bank capital nity to consider developing a macrorequirements. In summation, Knight financial stability framework in superviadvanced, as an overarching considera- sory and monetary policymaking, as an tion, a new regulatory paradigm, by say- alternative to the serial bubbles that we ing that, “The recent turmoil has high- have experienced over the past ten years: lighted the need for better coordination the dot-com equity bubble, the housing of financial regulation and supervision bubble, the credit bubble and perhaps the across institutions, markets, and jurisdic- latest one, the commodity price bubble.” tions.” The justification for new paradigms is Indeed, BIS officials and their central rooted in widespread disappointment in bank members appear to have come to the VaR-based models. According to the conclusion that, despite the apparent Hannoun: “economic capital and VaR success of the Federal Reserve in mone- techniques amount to transforming large nominal amounts into very small values at risk. This reduces the perceived order of magnitude of risk exposures and gives a false sense of comfort.” He added that the recent turmoil was a reminder that “nominal and notional amounts do matter when looking at risk exposures.” The evolving BIS perspective is not only a backlash from the market turmoil, it is also a new call for evolving risk and regulatory benchmarks to support future reforms. The next generation of risk management systems for banks and capital adequacy systems for their regulators must operate in sync if the goal is to prevent the kind of unpleasant surprises that have recently undermined confidence in the global banking and credit markets. Ultimately, these surprises seem also to have given bankers a reason to reconsider a situation in which years of their invested energies may give rise to a reformed capital regime which is still inadequate for the modern banking system. BJ For more on Basel II, go to ababj.com and look under ABABJ Blogs Snapshot C&I asset quality—a few cautionary signals A midst all of the credit-related turmoil of the last few quarters, the commercial and industrial (C&I) lending segment has been largely untouched. Recent trends, however, suggest an uptick in problem loans in the segment with the first-quarter 2008 ratio of noncurrent C&I loans to total C&I loans increasing by 14 basis points at the national level as compared to the fourthquarter of 2007. To get a sense for the geographic concentration of the problem loans, SNL took a look at state-level commercial bank data aggregated from the call reports. The table shows the states with the highest numbers. New Hampshire stood out with a noncurrent ratio in the C&I segment of 5.12%, the state had previously run at around 1% to 1.5%, so the uptick was large indeed. Puerto Rico, while not technically a state, was near the top of the list with a ratio of 4.68%, up from the prior period, but largely in-line with prior behavior. Delaware and Minnesota also made the top of the list with increases in the 40 basis point range on a linked-quarter basis. The Southwest was represented with both Arizona and New Mexico showing up on the top-ten list. The outlook for the C&I lending segment for the rest of the year is largely mixed following geographic lines. Look for noncurrent loans for the nation as a whole to creep upward. Regionally look for concentrations in areas that have experienced higher levels of losses in the 1-4 family loans segments as those woes spread into the general economy of the region. Losses in the C&I category tend to have a longer tail than 1-4 family loans and upticks in the latter are generally a precursor to upticks in the former. —John McCune, SNL Financial jmccune@snl.com Asset Quality Trends: C&I Lending U.S. commercial bank aggregates, 10 worst-performing states in Q1 2008 Noncurrent C & I Loans / Total C & I Loans (%)* State aggregates 2007Q1 2007Q2 2007Q3 2007Q4 2008Q1 New Hampshire Puerto Rico Alaska Delaware Minnesota New Mexico Arizona Michigan Iowa Nebraska U.S. Source: SNL Financial 1.21 2.67 1.64 1.28 1.40 1.10 0.34 0.52 0.97 1.00 0.61 0.94 4.57 1.32 1.34 1.41 0.98 0.74 0.56 1.09 1.06 0.61 1.49 3.59 1.33 1.31 1.42 1.06 0.52 0.57 1.29 0.94 0.63 1.71 3.86 2.19 1.41 1.25 1.03 0.63 1.13 1.21 1.06 0.64 5.12 4.68 2.84 1.90 1.60 1.55 1.46 1.45 1.37 1.37 0.78 *Noncurrent loans defined as nonaccrual loans plus loans 90 or more days past due 8 JULY 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.ababj.com http://www.snl.com http://www.ababj.com

Table of Contents Feed for the Digital Edition of ABA Banking Journal - July 2008

ABA Banking Journal - July 2008 Contents Editor’s Column Searching for New Paradigms at BIS Snapshot: C&I Asset Quality 100th Anniversary: Then & Now BofA "Event Concept" Wins Awards, and Customers ABA Resources ABA Chairman’s Position M&A: Beat Today's Market Blues Pass the Aspirin Cover Story: Workout Time Correspondent Banking: No Longer Just a Handshake Business Getting IT Right By Thinking It Through Webnotes Are You "Red Flag" Ready? Mailbox Banker’s Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - July 2008

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