Week of June 23, 2008
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Risk News Archive
Credit Risk
Bond Insurers Want $125 Billion of Cover Wiped Out
Investors Hide as Banks Come Knocking
Demand Flat at Discount Window
Investment in U.S. Commercial Real Estate Falls 70 Percent
Banks Find New Ways to Ease Pain of Bad Loans
A Brave New World for Financial Regulation
Moody's May Align Municipal Debt Ratings With Corporate
Health REITs Provide Bright Spot
OCC: Standards Tighter in Retail and Commercial
Credit Crisis Could Last Another Four Years, Predicts BlackRock's Doll
NY Fed Chief Urges Global Bank Framework
S.E.C. Proposes Tighter Rules for Credit Ratings Companies
REIT Trading Volume Jumps as Goldman Urges Caution
Market Risk
Key Data Still Suggest a Recession
Inflation Now Enemy No. 1 for Fed
U.S. May Face Greater Competition for Foreign Investment in Coming Years
Economists Predict More Pain Ahead But No Recession
Slowing Economy Helps Curb Inflation
Economy Remains Sluggish, Fed Says
Operational Risk
Agencies to Mull Basel II Approach
Fed, SEC Near Accord to Redraw Wall Street Regulation
Guidance Focuses on Liquidity Risk
Enterprise Risk
Insurance Industry Poised for Growth Despite Challenging Environment
'Red Flags' and the Five Stages of Grief
As Fed Hurries Up, Banks Catch-Up
Securities Lending
Sec Lending Sees Challenges, Opportunities in Credit Crunch
Consumer Lending
Lending Limbo: Can Any Borrowers Qualify In Today's Market?
Data on Housing Relief Questioned
Data Doing More Steering of Delinquency Handling
Illegal Immigrants Are Good Risks, Lenders Find
Servicer Offers a Deal to Banks Clinging to Assets
Mortgage-Securities Revival Proves Elusive
Credit Risk
Bond Insurers Want $125 Billion of Cover Wiped Out
Financial Times (06/22/08) ; van Duyn, Aline
Following a rash of credit ratings downgrades among bond insurers, MBIA, Ambac, and FGIC are turning to banks and asking to "commute" $125 billion in risky debt securities as a way to limit their financial losses. These bond insurers and banks holding the credit default swaps in question would need to reach an agreement on the value of these contracts in order for the strategy to succeed. The uncertainty surrounding the value of these contracts continues to weigh heavily on bond insurers' ratings, which is why an agreement would greatly improve their chances of obtaining market stability. Standard & Poor's estimates the nominal value of these credit default swaps and collateralized debt obligations at $125 billion, and Merrill Lynch, UBS, and Citibank are just a few of the firms taking large writedowns in relation to these securities. If the banks and bond insurers reach an agreement, the banks would receive an upfront payment in exchange for declaring the insurance policy void.
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Servicer Offers a Deal to Banks Clinging to Assets
American Banker (06/23/08) P. 9 ; Berry, Kate
Fort Worth-based Residential Credit Solutions Inc. is a startup devoted to purchasing and servicing distressed mortgages, but President Dennis Stowe says banks and lenders are hesitant to unload their assets as they weigh whether it is better to sell nonperforming assets at substantial discounts or hang onto them despite the likelihood of additional price declines. According to Randy Appleyard, Residential Credit's head of asset sourcing, "We can move the assets off their books and make it a sale, because we bring two things--capacity and capital. Or if a bank wants to take those assets to market, we can bid for them." The company underscores the importance of loss mitigation and indicates that suitable strategies do not involve keeping assets and letting them further deteriorate. The firm could handle up to $6 billion in loans and services $1 billion currently, and Stowe points out that its loss mitigators handle only 125 cases each--far fewer than the 500 to 1,000 cases taken on by loss mitigators at many third-party servicing firms.
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Investors Hide as Banks Come Knocking
Wall Street Journal (06/23/08) P. C1 ; Sidel, Robin
Sources report that large investors are increasingly reluctant to participate in capital-raising transactions in the wake of the billions of dollars in losses that banks have incurred due to bad loans and bad investments. Most of the banks that distributed new securities in recent months have continued to experience substantial declines in share price, and one banker states that "Investors are tired of trying to catch a falling knife." Many Wall Street firms and commercial banks have raised capital, and in the coming months many more financial institutions are expected to apply the same strategy as regulators put pressure on these institutions to guarantee that they have sufficient capital levels to weather the credit squeeze. "Obviously, the investors who jumped in early are down materially, but I don't feel by any measure that the market is closed or dead," says KBW Inc. Chairman and CEO John Duffy. He blames a great deal of the recent stock-value slide on "the sentiment that the banks didn't raise enough capital and will be back to the market at even lower prices." In a recent report, Sandler O'Neill & Partners banking analyst Joseph Fenech comments that the decline in share prices of banks that recently raised capital is partly attributable to doubt as "investors began to assess the possibility that many companies would soon be back to the well for additional capital and/or began to more fully digest the massive dilution associated with these actions."
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Mortgage-Securities Revival Proves Elusive
Wall Street Journal (06/23/08) P. C2 ; Bryan-Low, Cassell; Mollenkamp, Colleen
In the last several months, numerous hedge funds have been dabbling in down-and-out securities linked to the fate of U.S. homeowners, most notably bonds backed by subprime mortgages. Economists and legislators are keeping a close eye on their moves, believing they can play an important part in ending the turmoil that has weighed down the nation's financial markets. To date, however, these funds have had little success in attracting investors, as placing a value on mortgage securities in these uncertain times continues to be complicated. Nevertheless, the case to buy remains compelling, with the prices of highly rated subprime-backed securities having plunged nearly 40 percent on average since the credit crisis took hold in the summer of 2007.
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Demand Flat at Discount Window
American Banker (06/20/08) P. 20 ; Rehm, Barbara A.
The Federal Reserve Board reported on June 19 that discount window borrowing was more or less flat, standing at $21.8 billion on June 18. A little more than $14 billion of the loans will come due within 15 days, and the remaining $7.85 billion will mature within 16 to 90 days. A less than 2 percent increase in loans to commercial banks to $13.7 billion was posted, while loans to investment banks experienced a 4.4 percent decline to $8.15 billion. This was the third week in a row that investment banks requested less than $10 billion and the total is less than 25 percent of the $37 billion investment banks borrowed in late March when the facility had been opened for only a week. Discount window lending is still led by the New York Fed, which distributed $18.65 billion of the loans, while the San Francisco Fed and the Chicago Fed issued $1.84 billion and $806 million, respectively.
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Investment in U.S. Commercial Real Estate Falls 70 Percent
Los Angeles Times (06/19/08)
Banks continued to clutch their purse strings during the first quarter of 2008, contributing to a 70-percent slide in U.S. commercial property investment. According to the National Association of Realtors, investor commitment to commercial real estate during the January-through-March period sank to $48.2 billion from $157.8 billion a year earlier. "Slow economic growth is lowering demand for commercial space, mostly in the office and industrial sectors," said NAR chief economist Lawrence Yun. Even so, he noted that the commercial real estate market is holding up much better than it did during the last recession in 2001.
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Banks Find New Ways to Ease Pain of Bad Loans
Wall Street Journal (06/19/08) P. C1 ; Enrich, David
Banks are engaging in creative maneuvers to downplay bad loans, although these moves, while legal, could arouse deeper suspicion about financial stocks. David Fanger with Moody's Investors Service warns that "Spending all the time gaming the system rather than addressing the problems doesn't reflect well on the institutions." Plummeting real-estate values are provoking anxiety among investors and analysts about Wells Fargo & Co.'s $83.6 billion portfolio of home-equity loans, and until recently the bank considered such loans a write-off once borrowers fell 120 days behind on payment. On April 1, however, Wells Fargo extended that period to 180 days, which some observers say will delay a series of losses and shore up the bank's second-quarter results. "The extra time helps avoid having loans charged off when better solutions might be available for our customers," says Wells Fargo's Julia Tunis. RBC Capital Markets analyst Joe Morford describes the strategy as "out of character for Wells," adding that "They tend to use more conservative standards." Another creative tactic is to change bank charters so that a lender is audited by another regulator, as Colonial BancGroup Inc. recently did.
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A Brave New World for Financial Regulation
Wall Street Journal (06/19/08) P. A15 ; Cox, Christopher
The U.S. Federal Reserve was forced to provide liquidity to investment banks in order to restore market confidence after investors and account holders made a run on Bear Stearns. This opinion piece by U.S. Securities and Exchange Commission Chair Christopher Cox notes that the move raised questions about federal regulation of the banking industry and its ability to prevent further market rushes. Cox says the government must devise a way in which it can provide a liquidity backstop to the banking sector without compromising the need for strong risk management among those market players. Cox warns that without protections beyond those provided by the SEC for broker-dealer's customers, a lack of confidence in investment banks could cause large withdrawals by customers and counterparties that threaten the financial system, much like what happened with Bear Stearns earlier this year. While the Fed should be admired for its swift resolution to the Bear Stearns debacle, opening Fed lending to investment banks has "exposed a lack of symmetry with respect to the explicit statutory terms on which commercial banks get this privilege." Investment banks do not pay into an insurance fund, like commercial banks. Additionally, when one commercial bank needs to be rescued, the entire industry is assessed. Even though commercial banks are subjected to more restrictive regulation--such as requiring prior approval before entering innovative lines of business--those regulations failed to curb subprime and risky lending in the mortgage sector. Cox notes that only Congress can determine which federal entity will have monitoring powers over the investment banking sector; but for now, the SEC and the Fed have adopted a voluntary program that encourages firms to strengthen their balance sheets and raise new capital, as well as disclose liquidity. Cox says, "We must be careful to construct a regulator approach that meets our regulatory objectives without discouraging risk-taking or neutering Wall Street's ability to fuel economic growth and innovation."
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Moody's May Align Municipal Debt Ratings With Corporate
New York Times (06/13/08) ; Bajaj, Vikas
Moody's Investors Service announced it would consider adopting its corporate ratings process for municipal bonds and debt. The move, which cities and state governments have pushed for since the subprime mortgage crisis began, would lower borrowing costs for many governments at a time when the economy is struggling. However, if borrowing costs are lowered and municipal bonds and debt receive better ratings, the need for bond insurance would fall, which does not bode well for a sector currently struggling to stay afloat financially. Moody's Executive of Public Finance Ratings Gail Sussman says, "The tide that has changed is that there is greater demand and need for rating comparability today given the changes in the market." Moody's latest proposal, which calls upon analysts at the firm to subjectively evaluate municipal bonds with AA or A ratings, will be open to comments through June 30. Moody's will use risk of default, quality of management, level of financial disclosure, and timely payment data to make ratings decisions on municipal debts under the corporate scale. It is unclear if Standard & Poor's or Fitch Ratings will follow Moody's lead. However, Standard & Poor's has touted its use of the same scale for municipal and corporate debt all along; "We strongly believe in the usefulness of our global rating scale because it is designed to serve as a common language for evaluating and comparing creditworthiness across all major sectors and geographies," said Edward Sweeney, a spokesman for the firm.
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Health REITs Provide Bright Spot
Wall Street Journal (06/18/08) P. C12 ; Wee, Sui-Lee
Health-care REITs are providing one of the few bright spots in a slowing economy as many look to expand their development pipelines. Stifel Nicolaus reports that some of the largest health-care REITs by stock-market value--HCP Inc., Ventas Inc., Healthcare Realty Trust Inc., Nationwide Health Properties Inc. and Health Care REIT Inc.--are expected to build $675.9 million of properties by the end of this year. That is an increase from $236.5 million a year earlier. Aging baby boomers looking for more affordable outpatient care are fueling demand for medical-office buildings. Meanwhile, senior housing facilities are banking on the steadily growing demographic of older and affluent people, reports Stifel Nicolaus health-care real-estate analyst Jerry Doctrow. Together, these trends have helped health-care REITs outperform the overall REIT sector, increasing 10.8 percent during the 12 months ended June 17 compared with a 15.4 percent fall for the MSCI U.S. REIT Index. In recent months, banks have shown a willingness to provide large revolving credit lines to health-care REITs because their balance sheets are so strong. Those REITs that develop private-pay, senior housing facilities benefit from Fannie Mae and Freddie Mac, which both have mandates to provide market liquidity and funding to ease the current real-estate slowdown.
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OCC: Standards Tighter in Retail and Commercial
American Banker (06/13/08) P. 3 ; Hopkins, Cheyenne
According to the Office of the Comptroller of the Currency's annual underwriting survey, 52 percent of national banks have tightened their commercial lending standards after four consecutive years of easing underwriting standards. Meanwhile, 68 percent have tightened retail underwriting standards. OCC officials confirm that the number of banks reporting tightening standards on commercial loans was more than three times those that reported the same last year. Agency officials lament that tighter standards likely came too late to avoid some future losses.
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Credit Crisis Could Last Another Four Years, Predicts BlackRock's Doll
Reuters (06/09/08)
BlackRock chief investment officer Bob Doll said on June 9 that the worldwide credit crisis will continue for another two to four years as more bank writedowns are incurred by the deteriorating U.S. economy. He said that the worst point of the crisis passed after the Federal Reserve saved Bear Stearns in March, but cautioned that a U.S. slowdown could create more credit-related problems. "Whether it is in the mortgage area ... or in other consumer loans, auto loans, credit card loans--there are more write-offs to come," Doll warned during a visit to Singapore. Standard & Poor's reported on June 6 that the number of companies around the world at risk of getting a credit downgrade peaked last month amid the credit crunch, and Doll said that the Fed's opening of its discount window to investment banks dramatically lowered the likelihood of another failure like Bear Stearns. "The point is policy-makers make bold, creative moves when the pressure is on and their back is [against] the wall," he noted. Doll reported that though the growth of the U.S. economy is likely to slow down, a recession is not likely as long as oil and commodities prices do not continue to rally.
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NY Fed Chief Urges Global Bank Framework
Financial Times (06/08/08) ; Politi, James
Federal Reserve Bank of New York President Timothy Geithner called for the creation of a unified regulatory framework for banks at a recent Economic Club of New York meeting. Geithner, who helped engineer the rescue of Bear Stearns, said that the U.S. Federal Reserve should play an important role in a global framework, working closely with international regulators. U.S. lawmakers continue to examine whether a regulatory overhaul is necessary given the current credit crisis. Currently, commercial banks are regulated by the Federal Reserve and investment banks are overseen by the Securities and Exchange Commission. Geithner said that the current system is confusing and leaves "huge opportunities for arbitrage and evasion." However, congressional action is unlikely until the new administration takes office in 2009. Geithner also indicated the Federal Reserve would consider making temporary liquidity facilities permanent. He also urged central banks to establish a network of currency swaps, collateral policies, and account arrangements to increase liquidity in case of another crisis.
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S.E.C. Proposes Tighter Rules for Credit Ratings Companies
New York Times (06/12/08) P. C2
The Securities and Exchange Commission (SEC) has proposed new rules aimed at expanding disclosure in the credit rating industry and flagging the ratings of more complex securities. In doing so, SEC officials are striving to make the ratings business more open while also encouraging new firms to enter. The trio of firms that currently dominate the industry--Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings--have come under fire for failing to identify risks in subprime mortgage investments. As home loan delinquencies have increased and the value of those investments has plunged, these three agencies have downgraded thousands of securities backed by mortgages--actions that have, in turn, contributed to billions of dollars in losses and writedowns at major banks and investment firms.
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REIT Trading Volume Jumps as Goldman Urges Caution
Wall Street Journal (06/12/08) ; Tracy, Tennille
Options traders were all over REITs on June 11 after Goldman Sachs publicly stated that "the worst is yet to come" for such companies. For instance, trading in Simon Property Group Inc. soared to twice the normal daily volume as investors pursued "credit spreads" that make money if the REIT's stock trades at or below recent levels. According to Wall Street insiders, this position will work best if Simon Property shares trade below $100 until at least July 18. Simon Property closed the June 11 session at $94.09, a decline of 2.5 percent. Options traders also turned their attention to ProLogis, a Denver-based REIT that specializes in leasing industrial space to manufacturers, retailers and transportation companies. Wagering that ProLogis' stock will trade within a range between now and October, investors sold so-called "strangles" in the company's options. Finally, with regard to General Growth Properties Inc., Interactive Brokers' Rebecca Engmann Darst notes that the options market is pricing in a 40 percent higher risk over the next 30 days.
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Market Risk
Key Data Still Suggest a Recession
Wall Street Journal (06/20/08) P. C1 ; Gongloff, Mark
Mark Gongloff writes that the avoidance of a recession is becoming less likely when various indicators measured by the National Bureau of Economic Research are considered. He reports that gross domestic product (GDP) has experienced hardly any growth, while nonfarm payrolls, personal income, industrial production, and manufacturing and trade sales have already peaked. "These dials point to an economy muddling through and at risk of worse," Gongloff comments. "That makes the recession/not-recession argument academic for many Americans and for the markets." Gongloff says nonfarm payrolls peaked in January and since then 324,000 jobs have been lost, indicating a reversion to August 2007 levels. Personal income, not including "transfer" payments such as Social Security checks, topped out in December and was down 0.1 percent through April. Gongloff notes that the temporary spending relief offered by tax-rebate checks is being soaked up by rising food and energy prices. Industrial production has declined 1.4 percent since peaking in January, while manufacturing and trade sales were down more than 3 percent in March after hitting their apex in October 2007. Meanwhile, a monthly GDP index compiled by Macroeconomic Advisers topped out in January and slid 0.2 percent through April.
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Inflation Now Enemy No. 1 for Fed
Wall Street Journal (06/19/08) P. A2 ; Wessel, David
Avoiding inflation is the leading priority for the U.S. Federal Reserve amid soaring consumer prices driven by spiking food and energy costs, and Fed Chairman Ben Bernanke has promised that his agency "will strongly resist an erosion of longer-term inflation expectations." Wall Street Journal global economics editor David Wessel writes that some solace can be found in central bankers' anxiety about inflation, since it means that they are less worried about the country falling into another Great Depression caused by the housing and credit crises. "Although the triple whammy of rising oil prices, falling home prices, and a continuing credit crunch pose significant 'downside risks,' in the Fed's parlance, the U.S. economy kept growing, perhaps feebly, through the current quarter," he notes. Wessel also points out that, aside from food and energy costs, the consumer price index is up 2.3 percent, which is not much different from the past several years. He says that U.S. wages have not started rising faster in spite of increasing prices and inflation anxiety, and the Fed is striving to ensure that they do not. "It is, essentially, trying to keep enough slack in the economy so prices outside energy and food don't take off," Wessel explains. He observes that Bernanke has made it a point for much of the past year to vocalize his determination to avoid the costly Fed errors that contributed to the Great Depression. "But he also is mindful of the Fed mistakes of the 1970s that contributed to the Great Inflation, and wants you to know that he is determined to avoid those as well," Wessel concludes.
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U.S. May Face Greater Competition for Foreign Investment in Coming Years
Financial Week (06/18/08) ; Rummell, Nicholas
Although the United States currently attracts the most foreign investment, it may soon be surpassed by China and India, forecasts a survey of CFOs and other leaders. The survey of 300 executives was conducted by KPMG, and found that 27 percent of respondents felt that U.S. markets will continue to be the leader in foreign investments in 2008 and 2009. Seventeen percent of respondents ranked China highest, 14 percent the United Kingdom, and 13 percent Germany. Twenty-four percent of respondents said that China will likely become the leading investment target in 2014, while 19 percent mentioned Russia, and 18 percent India. India is anticipated to experience the biggest growth in foreign investment across all business sectors and is predicted to soon be an investment leader in manufacturing. In a statement, KPMG tax partner Shaun Kelly said the strong cash flow into the United States is likely because of overseas firms’ wish to leverage the weak dollar. To retain foreign investment in the United States, the U.S. Chamber of Commerce and a panel headed by Harvard University Professor Hall Scott advocates regulatory changes and limitations on class action lawsuits. Scott's panel reported in May that there were only 25 global IPOs by foreign companies in U.S. markets valued at $8.3 billion during the first quarter of 2008, compared to 335 in 2007 valued at $95.8 billion.
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Economists Predict More Pain Ahead But No Recession
Los Angeles Times (06/18/08) ; Vincent, Roger
The faltering housing market will continue to put pressure on the nation's economy in the months to come, but researchers at UCLA say a recession is unlikely. Despite being able to hold onto their jobs, many homeowners have been willing to sell houses at a loss that are no longer worth as much as what is owed lenders, says economist Edward Leamer, director of the quarterly UCLA Anderson Forecast. The economy is expected to see little or no growth through 2009, distressed home sales will continue, and market analysts will focus more on home prices as foreclosures decline. "The unprecedented speed of the price adjustment means that instead of several years of slow bleeding [like the 1990s] we have compressed the necessary adjustment into two years of intense housing pain," writes UCLA economist Ryan Ratcliff.
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Slowing Economy Helps Curb Inflation
Wall Street Journal (06/12/08) P. A2 ; Evans, Kelly
There is a more immediate danger of a U.S. recession rather than inflation thanks to the economic slowdown, according to the Federal Reserve's beige book survey, which graded economic activity as "generally weak" over the past six weeks. The poll indicates that the housing market's slump was sustained; consumer spending decelerated in most parts of the United States; and credit standards on consumer, residential, and commercial loans tightened in all regions that disclosed them. The survey was taken as proof that the Fed will probably maintain interest rates at its policy meeting on June 24-25. The American economy has managed to expand in spite of the housing, credit, and labor market crises, with gross domestic product growing at a 0.9-percent annual rate in the first quarter of 2008 and on track to register similar growth in the second quarter. Federal Reserve Bank of St. Louis President James Bullard reported on June 11 that "the likelihood of a measurable contraction in growth this year has lessened," which "complicates the inflation outlook, in which significant economic slack had been seen as helping to keep inflation in check." The beige book poll also signals that manufacturing activity is still lethargic, while continued enervation in housing-related industries and auto sales is being partly countered by exports.
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Economy Remains Sluggish, Fed Says
Washington Post (06/12/08) P. D1 ; Irwin, Neil
The Federal Reserve's most recent beige book report shows "softer, weaker or lower" economic activity in three regions and "slower, sluggish or modest" growth in four regions in late April and May, with the other five regions reporting that their economies have held steady since the previous report. Experts say consumers and businesses are being hit hard by rising fuel and energy prices and a weaker job market, with gas prices ranking as Federal Reserve Chairman Ben Bernanke's top concern. With regard to housing, the beige book indicates "exceptional" weakness on the West Coast and general weakness nationwide. The report will be used by the central bank to determine how to treat interest rates at its June 24-25 meeting, but experts believe concerns about inflation will cause policymakers to leave rates alone.
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Operational Risk
Agencies to Mull Basel II Approach
American Banker (06/23/08) P. 16 ; Sloan, Steven
The Federal Reserve Board is planning to meet June 26 to discuss a notice of proposed rulemaking concerning the Basel II Accord's standardized approach for risk management. Smaller banks will have the option of using the standardized approach rather than the advanced approach the big banks will use, but Federal Deposit Insurance Corp. Chairman Sheila Bair says that big banks should also be allowed to use the standardized approach. The Fed has opposed that view thus far.
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Fed, SEC Near Accord to Redraw Wall Street Regulation
Wall Street Journal (06/23/08) P. A3 ; Scannell, Kara; Solomon, Deborah; Reddy, Sudeep
Greater cooperation is expected under the newly hammered out agreement between the U.S. Federal Reserve and the U.S. Securities and Exchange Commission (SEC). According to insiders, the agreement is expected to help regulators detect trouble among investment banks before a near collapse, like the one at Bear Stearns. The regulators will share information on settlements, trades, and positions. The SEC will obtain information from the Fed on short-term financing from banks clearing trades and holding collateral for securities firms, while the Fed will receive information on investment banks' trading positions, leverage, and capital requirements. The agreement will help the Fed oversee investment banks, to which the Fed now offers discount window lending. SEC Chair Christopher Cox says, "[The SEC has responsibility for overseeing investment banks and the Fed] has an interest in monitoring systemic risk generally and in protecting its funding commitment." Meanwhile, the U.S. Treasury's financial regulation reform proposal continues to gain acceptance among regulators, though congressional action is unlikely this year.
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Guidance Focuses on Liquidity Risk
American Banker (06/18/08) P. 3 ; Sloan, Steven
Higher capital requirements and more rigorous supervision for U.S. banks could be driven by draft guidance issued by the Basel Committee on Banking Supervision featuring over a dozen principles designed to bolster liquidity risk management, including broader stress tests to account for broader market events instead of just risks at an individual bank. The draft states that "A bank should carefully consider short-term and protracted, as well as institution-specific and market-wide, stress scenarios in its stress tests, including: a simultaneous drying up of market liquidity in several previously highly liquid markets; severe constraints in accessing secured and unsecured funding; restrictions on currency convertibility; and severe operational or settlement disruptions affecting one or more payment or settlement systems." Regulators rationalized the necessity of these changes with banks' failure to adequately assess liquidity risk in the lead-up to the credit crisis. "Many of the most exposed banks did not have an adequate framework that satisfactorily accounted for the liquidity risks posed by individual products and business lines, and therefore incentives at the business level were misaligned with the overall risk tolerance of the bank," according to the draft. The draft also pressures regulators to be more proactive in evaluating a bank's liquidity risk, and the Basel Committee recommends that a regulator that deems a bank's liquidity provision to be unsafe should be empowered to mandate that the bank fortify its liquidity management, enhance contingency planning, limit the bank from making acquisitions, or require more capital.
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Enterprise Risk
Insurance Industry Poised for Growth Despite Challenging Environment
Risk Center (06/18/08) ; Fogerty, Elizabeth
According to Deloitte's "Global Insurance Industry Outlook--Mid-Year Update 2008" report, the insurance sector is still poised for growth in spite of the recent pressures on premiums, market softening, and heightened global competition. With the current challenges facing the insurance sector, growth can be tricky, especially if carriers rely solely on traditional strategies. According to Deloitte's U.S. Insurance Leader Rebecca C. Amoroso, "Insurers can drive growth by taking a holistic approach geared toward enterprise-wide improvements, including refocusing on their distribution networks, developing and delivering products geared toward the burgeoning retirement market, and understanding and realigning their business through analytics." Experts view the retirement market as a major growth opportunity for insurers because they are able to offer "guaranteed" products, unlike mutual fund firms. Moreover, the report suggests that insurers view distribution as a major profit center, rather than as a cost of doing business, because it will allow them to market through multiple channels and carefully align agents with customers. The use of synthetic data and unstructured text applications also can improve underwriting, claims administration, marketing, and distribution. Moreover, insurers must engage in enterprise risk management (ERM) because regulations coming down the pike will require it, and ratings agencies already look at how insurers use ERM in their operations.
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'Red Flags' and the Five Stages of Grief
Bank Technology News (06/08) ; Sausner, Rebecca
The Federal Trade Commission gave banks one year to comply with the FACT Act's "Red Flags" provisions, which require these entities to identify indicators of identity theft, develop mechanisms to detect those indicators, implement appropriate responses to those red flags, and update systems to address the latest fraud trends. Many banking institutions ignored the rules when first issued in July 2006, but once the final rules were approved in October 2007, bankers began to fear the repercussions of the regulations. Banking firms then began to wonder how much the upgrades would cost, and upon review of the available products, banks realized the upgrades would be significant and require expenditures many were unprepared to make. Nov. 1, 2008, is the compliance date.
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As Fed Hurries Up, Banks Catch-Up
Bank Technology News (06/08) ; Fest, Glen
Those banks that have already converted to paperless check imaging find that many of their paperless checks must be converted back to paper since a number of small and midsize banks have not upgraded to check imaging technology. However, as the Federal Reserve reduces its check cashing operations to four facilities in Philadelphia, Dallas, Cleveland, and Atlanta, paper-based processors will see their costs rise for transportation and image replacement documents. However, banks that convert to electronic check imaging find Fed-related operational costs fall about 60 percent. Meanwhile, those banks still engaged in paper-based check processing could see costs rise as much as 25 percent under the new consolidated Fed system.
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Securities Lending
Sec Lending Sees Challenges, Opportunities in Credit Crunch
Securities Industry News (06/02/08) ; Kentouris, Chris
Boston-based research firm Vodia Group reports that 38 percent of the 32 executives it surveyed at leading global asset management firms lost money in their cash collateral pools over the past year, highlighting the potential risks confronting stock lenders in the wake of the credit crunch. The credit crunch also presents opportunities, notes Ed Oliver, senior business consultant at securities lending consultancy Spitalfields Advisors. "As credit spreads widened with the crisis, securities lenders could earn significantly greater returns," he says. According to a recent Spitalfields report, lenders who reinvested cash collateral had the opportunity to buy the same assets as before, but with a reward that was two to three times higher. U.S. stock lenders have traditionally preferred cash collateral due to its lower investment risk, as well as the ability to reinvest the cash in a separate pool to increase potential yield. "Cash collateral reinvestment pools that may have generated five to ten basis points prior to the credit crunch have been generating in excess of 20, 30 or 40 basis points of net spread in recent quarters due to the declining interest rate environment and widening credit spreads," says Chris Jaynes, president of eSecLending, a Boston-based electronic securities borrowing and lending agent. "Record earnings are continuing for beneficial owners in the first half of 2008." James Wilson, managing director of securities lending at JPMorgan, says beneficial owners are asking more questions and reading the fine print of their lending programs. "Rigorous due diligence is not a new trend and clients have been placing greater emphasis on transparency of their cash reinvestment pool," says Wilson. "While custodian banks indemnify their clients against borrower default, the underlying lender must still absorb the cash collateral risk." Valuation of assets remains an issue, and although JPMorgan does not follow Rule 2a-7 of the Investment Company Act of 1940, Wilson says it takes a "conservative" approach that is based on the risk appetite of the client. Some lenders change their requirements to high-quality, shorter-term assets, says Wilson, adding that they also restrict their exposure to instruments with "headline risk."
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Consumer Lending
Lending Limbo: Can Any Borrowers Qualify In Today's Market?
Investor's Business Daily (06/20/08) P. A8 ; Doler, Kathleen
Despite legislative efforts to ease the home loan credit squeeze, mortgage professionals say the lending environment remains extremely tight--even for people with excellent credit scores--and shows no signs of relief. Particularly troublesome developments range from dried-up lending for second mortgages and home equity loans to higher down-payment requirements and condominium loan restrictions. While the self-employed and those with investment income are finding this lending marketplace especially hostile, even those who do provide documentation of income are being put under a microscope. Finally, mortgage insurers now have a greater say on down-payment requirements for some loans, even going so far as to reject certain loan packages put together and approved by lenders.
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Data on Housing Relief Questioned
Washington Post (06/13/08) P. D1 ; Cho, David; Merle, Renae
The top regulator of the nation's largest banks eased off his criticism of the data that mortga