ABA Banking Journal - November 2008 - (Page 10)

After the crisis briefing experience base in credit. “In my 40-year career in banking, how you analyze credits, structure loans, that hasn’t changed,” says Thomas A. Bracken, regional president at TriState Capital Bank, a $750 million-assets de novo serving multiple states from Pittsburgh, Pa., and satellite offices. Many of the techniques—obtaining guaranties, and such— remain constant, like basic industrial processes. The only significant change in those building blocks has been that more is done using technology, he notes. “The basics are the basics,” says Bracken. “So if you stuck to that, you probably have a limited amount of pain.” However, something that has changed is the age and sophistication of front-line lenders. “Unfortunately,” says Bracken, “there aren’t a lot of veterans left.” This can lead to some significant laps- Banking 2.0 “There’s a real turnoff on securitization, for a while. The self-correcting mechanisms didn’t seem to kick in as quickly as they should have.” Securitization allowed lenders to “pass the buck” on credit problems —Bert Ely, Ely & Co. New on ababj.com Understanding the “Digital Native” “Digital natives,” also referred to as the Millennials, Generation-Ts, or Late Gen Ys, comprise the segment of the population born after 1985. The difference between the digital native and “digital immigrants”—those born prior to 1985—is that the digital native has grown (or is growing) up immersed in technology, while digital immigrants did not grow up with it. Digital natives do not refer to a “digital camera,” they simply call it a “camera.” (What’s “film”?). Text messaging is their preferred communication. Author Dan Fisher, head of consulting firm The Copper River Group, explores the unique characteristics of this emerging segment both from the perspective of bank customers and bank employees on www.ababj.com (under “Exclusives”). As he writes, they are accustomed to speed, graphics, flat panels, and games, and are not inclined to sit in a training room and endure hours of PowerPoints. Fisher suggest bankers attend the Consumer Electronics Show in Las Vegas (usually in January) to get a better understanding of digital natives. es. One example is the revelation, to some younger front liners, that collateral values not only rise, but fall. Another, he continues, is why covenants are part of commercial loan contracts to begin with. “Veteran bankers know that covenants are one of the most important factors in a loan contract,” says Bracken. Covenants serve as an early warning system; as they are broken, a savvy lender knows it’s time to talk—or act. Younger players “are getting a master’s degree in a matter of months,” he says. Ed O’Leary worries about that process, because of its impact on these bankers’ future efforts. Loan officers in their 30s are in their “formative years,” according to O’Leary. Those who make it through the current period—especially if commercial real estate lending and other asset types follow the curve taken by residential lending—will be forming very conservative attitudes. O’Leary says such attitudes have a way of hanging on even after things turn around. For now, that is a remoter risk than others. Indeed, consultant Nick Ketcha notes that one message his firm keeps stressing to community banks is not to be tempted in bad directions by the growth of small business borrowers who want to shift to their institutions. “We’ve cautioned them not to grab at business,” says Ketcha. “This is not a time to be complacent, or thinking, ‘We’re isolated,’ or, ‘We’re removed from what’s going on.’ We expect to see spillovers of trouble in all parts of the banking business.” Securitization, hero turned villain Securitization accomplished financial miracles for a good part of its history. But then it became a big part of the problem. “Many of these structures did not pass risk off to anybody, and even if they did, the risk came back,” says David D. Gibbons, special adviser to Promontory Financial Group, LLC, Washington, and former Deputy Comptroller of the Currency for Credit Risk. Regulators and the industry struggled for years with the issue of recourse, and some of that effort became moot in the event. “The separation of an actor from the consequences of his action is a recipe for pathology in every other human endeavor,” says Randal Quarles, “so there’s no reason to think credit organizations are any different.” Quarles is managing director, The Carlyle Group, Washington, D.C. As the securitization engines repackaged debt and risk, leverage was piled on leverage. “It was bad,” says Quarles. The risks were spread, and broadly. “But it was like a manure spreader, if you will.” The government conservatorship of Fannie Mae and Freddie Mac cast a pall over the granddaddy of securitization, the secondary residential mortgage market. Ely doesn’t see “normality” returning to securitization markets for several years. “There’s a real turnoff on securitization, for a while,” says Ely. “The selfcorrecting mechanisms didn’t seem to kick in as quickly as they should have.” Securitization allowed lenders to “pass the buck on credit problems,” says Ely. He suggests that covered bonds, explained in detail in last month’s Briefing (p. 12), have the potential for displacing much of the need for securitization. He observes that covered bonds are more efficient than securitization. Other observers point out that some means of providing liquidity to the mortgage markets must be found. As homes begin to move again, there will be a need BANKING 2.0: CREDIT continues on page 18 10 NOVEMBER 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.promontory.com http://www.promontory.com http://www.ababj.com//content/view/501/121/ http://www.carlyle.com http://www.copperwombat.com http://www.ababj.com//content/view/501/121/ http://www.ababj.com//content/view/501/121/ http://www.ababj.com

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

ABA Banking Journal - November 2008 Contents Editor's Column Banking 2.0: Credit, Banking's Essence, Set for Rethinking Snapshot: The Few, the Proud, the Banks that Can Raise Capital Will Strong and Simple Banks Inherit the Business? Back to the Future ABA Resources ABA Chairman's Position Farm Lenders Must Take Care When Lending in Indian Country Pass the Aspirin Into the Breach Adventures Across A Century What the Future Holds, Post Crisis Paul Volcker: A Financial Legend Still Speaks Strong Ed Yingling: Weathering the Storm Dick Kovacevich: "Boring" Banking to Dynamic Financial Services Jim Culberson: Community Banking: What has Changed and What Shouldn't Walter Shipley: How a Chemical Reaction Helped to Mold Today's JPMorgan Chase William Isaac: Challenges and Opportunities Ahead for Banks A Hundred Years from Our Pages Eight Tech Innovations that Brought Banks into 21st Century Bank Cherokee: Third Generaton Marks 100th Year The First National Bank of Altavista: Railroad Gave Birth to a Town, a Hope Chest, and a Bank Rosedales Federal Savings and Loan Association: How a Friendly Game of Cards Turned into a 100-Year Mutual New Washington State Bank: Cooking Up the Next 100 Years Mailbox Banker's Mart To Advertise/Index of Advertisers The Economy

ABA Banking Journal - November 2008

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