The Data on Better Credit Diversification

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?…

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Managing Loan to Value with Rising Rates

If your bank is like most of its peers, your credit policy permits loan to value (LTV) ratios somewhere between 65% and 85% depending on the category, business cycle, and other forms of support.  In today’s competitive lending market, many banks are pushing boundaries, and loan to values are creeping higher.  We argue that banks…

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Use This Trick To Better Diversify Your Loan Portfolio

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…

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