Three chief credit officers discussed the challenges facing the industry during the next 18 months at a recent RMA audioconference. They also are concerned about the erosion of the risk/reward balance, increasing fraud, and the emergence of nonbanks in middle market and commercial real estate lending arenas.
Philadelphia, Pa. (December 6, 2006)—Regulatory scrutiny, loan growth, and the economy are major challenges facing the financial services industry during the next 18 months, according to the chief credit officers from three major financial institutions. Speaking during a recent audioconference sponsored by The Risk Management Association (RMA), these executives said they also are concerned about the erosion of the risk/reward balance, increasing fraud, and the emergence of nonbanks in middle market and commercial real estate lending arenas.
“The ever-increasing drumbeat of agency guidance and best practices is injecting an unprecedented level of cost into credit risk management,” said Jo Keeler, executive vice president and chief credit policy officer, Webster Bank and Webster Financial Corporation, Waterbury, Connecticut. “I’m not so certain it results in value added.”
Robert Bojdak, executive vice president and chief credit officer, M&T Bank, and Cindy Manzetti, senior vice president and chief credit officer, Fifth Third Bank, agreed. “The Federal Reserve is probing areas that we’ve historically never even addressed,” said Bojdak. “We’re not sure if it’s heightened concern or they’re just looking for things, but it has led us down some interesting paths.”
Loan growth, particularly growth that is accretive to the margin, is another concern in the current economic environment. “Growth prospects are hard to come by,” said Keeler. “The opportunities to extend credit on a commercial basis in 2007 will continue the drumbeat of lowered spread, compromised structure, and lengthened tenor. It’s troublesome because there is nowhere to run, nowhere to hide. The economy has covered a multitude of compromises in underwriting standards over the last several years.”
A major concern for Manzetti is “what we don’t know” because of the multitude of products being introduced and the shifting market for many products. “Risk managers relentlessly seek to keep the risk/reward ratio balanced,” she said. “We watch all of the pertinent risks, but the environment is changing and it’s complex.”
Bojdak agreed that there has been continued erosion in the risk/reward balance. “Recovering from some of our pricing in the long term may be questionable. Are we ever going to make it back up on a spread basis as we have in the past?” he asked.
Contributing to this imbalance is the emergence of nonbanks into the middle market and commercial real estate lending arenas, said Keeler, noting that he includes in the nonbank category hedge funds and unregulated financial institutions. “They take a different view of the credit risk profile, creating pressure on underwriting for us.”
Manzetti also is concerned about the increasing incidence of fraud. “While fraud is not principally a credit risk concern, loan fraud impacts us,” she said. “A lot of times you can’t see it coming. As an industry we have to be vigilant. The instances of fraud are increasing, and we need to find better and more collaborative ways to combat it.”
About RMA
Founded in 1914, The Risk Management Association is a not-for-profit, member-driven professional association whose sole purpose is to advance the use of sound risk principles in the financial services industry. RMA promotes an enterprise-wide approach to risk management that focuses on credit risk, market risk, and operational risk. Headquartered in Philadelphia, Pennsylvania, RMA has 3,000 institutional members that include banks of all sizes as well as nonbank financial institutions. They are represented in the Association by 17,000 risk management professionals who are chapter members in financial centers throughout North America, Europe, and Asia/Pacific. Visit RMA on the Web at www.rmahq.org.
Contact:
Kathleen M. Beans
RMA Public Relations Manager
215-446-4095