Correspondent Blog

Bankers have been taught to diversify their loan portfolio to reduce idiosyncratic (individual borrower) risk and to stabilize earnings. The thinking is that diversification-induced lending leads to banking resiliency. We believe that while lending diversification leads banks to lend more in normal times (especially for banks over $50B in assets) and does benefit the general…

Most banks are concerned with their credit portfolio. As credit risk increases with rising rates, the following question arises – is it better to diversify by geography, property type, or business type? Do you focus your marketing dollars and pricing on particular counties, commuter zones, types of commercial real estate loans, or specific C&I industries?…

You can slice and dice your credit portfolio all you want, but if you are not paying attention to cross-correlations, your efforts could be sub-optimal. For example, many banks separate their multifamily exposure away from their single-family exposure. In some markets, these two subsectors are almost 80% correlated. A drop in housing prices usually occurs…