Don't be afraid of Paul M. Dorfman.
The new chairman of Robert Morris Associates-the lending trade group responsible for guarding credit quality and promoting risk management-says he doesn't want to scare or nag people. But he does plan to champion prudence in today's heady loan market.
"It's not that we're going to stand up and say, 'The boogeyman is right around the corner-watch out,'" he said in a recent interview. "We're just trying to have people make rational valuations, because when people make rational valuations they tend to make rational decisions."
Mr. Dorfman, an executive vice president at BankAmerica Corp., takes the helm of Philadelphia-based Robert Morris amid record bank profits and high credit quality. During his one-year term, which began last week, Mr. Dorfman-who has served as vice chairman of BankAmerica's credit policy committee since 1986-wants to warn lenders against complacency that could lead to troubling losses when the current economic expansion slows or reverses.
"Things look very good in the sense that there are very few problems looming. But the people on RMA's board are very aware of the fact that the business cycle has not been repealed," he said.
If people get unusually cheerful today, they "may be unduly unhappy when problems come, even though the problems are just a perfectly normal level and something much to be expected," he added.
Founded in 1914, Robert Morris' membership now includes over 3,100 large and small banks; regulators; and securities, legal, and accounting firms. If Mr. Dorfman has one message for these members, which represent some 18,000 financial professionals, it's: Be prepared.
"Our feeling is that banks need to stay prepared for some possible downturns in the future," he said. "And just as much as being prepared, is being prepared to act sensibly when that comes and not overreact."
The key to avoiding future credit problems lies not only in good analysis of credit, but also in the willingness of lenders to make credit decisions that balance immediate revenue with long-term creditworthiness, Mr. Dorfman said.
"If you look back at the historical mistakes of the banking industry- times when the banking industry has lost a lot of money-it has not been from failures of analysis. It has been from failures of will," he said.
Several developments in the banking industry following its credit quality woes of the late 1980s and early 1990s have helped cut loan losses.
"One of the big differences is the people in middle and senior management today remember 1987. Having gone through difficult times brought on by credit problems, they don't want to do it again, so I think people are in fact being more cautious," he said.
Lenders also have a host of new ways to manage risk better.
Though bankers' options once were limited to either making a loan or not, the maturation of the syndicated bank loan market and the growth of portfolio management capabilities have created new choices.
"There's just a whole lot more tools available than there were, so one of the things that RMA is doing is make sure people know about these tools and become equipped to use at least some of them," he said.
Bankers can take advantage of the unprecedented liquidity in the loan syndications market to buy or sell loans and can use credit derivatives and structured notes to manage the level of credit risk in their portfolios.
Another positive industry development, Mr. Dorfman said, is the growing popularity of equity, such as stock options, in bankers' compensation packages.
"Part of that idea is to make sure that both the job of originating business and the people in the job of seeing that the business passes quality muster have the long-run interests of the bank at heart. Because it does no good to book the revenue today if it's going to turn into a loss tomorrow, and it does no good to have the world's safest portfolio if it's the world smallest portfolio," he said.
Yet there are still trends in the industry that warrant caution, he said.
Shrinking returns on loans and the increasing competition among banks and other financial services companies for consumer and corporate customers can pressure bankers into making credit decisions that they will ultimately regret.
The growth of "one-stop shopping"-in which bankers may make barely profitable loans in hopes of winning more of their clients' business - has also placed new pressures on credit quality.
"The real trade-off is how you value profitability today versus profitability over the long run," he said.
Mr. Dorfman's calm and rational appeal may help motivate bankers to remain vigilant about credit quality. If his and Robert Morris' calls for rational valuation don't do the job, an eventual uptick in losses will.
"There's incentive not to make dumb loans, because it comes around and bites you sooner or later if you do," he said.
