Bankers are looking to loan portfolio management techniques, such as syndications, both to reduce losses and to mitigate their effect on bank earnings, speakers at a Robert Morris Associates conference said.
Preliminary findings of a new risk management survey among 64 banks with assets of more than $5 billion showed that 59% now practice some form of active portfolio management, said Robert Zizka, a consultant at First Manhattan Consulting Group, which analyzed the survey for RMA.
These banks use a host of strategies and techniques to manage or adjust their exposure after credits are booked, he said. Indeed, the RMA survey found that, while only 24% of banks now use syndications to manage their corporate loan portfolios, 57% in the survey expect to use it often by 1999.
But 41% of the institutions surveyed did little if any grooming of their wholesale loan portfolios, sticking to the traditional pattern of lend-and- hold, according to Mr. Zizka.
"The historic solution to losses has been the execution of the senior credit officer," said Robert S. Strong, executive vice president and chief credit officer at Chase Manhattan Corp.
However, active portfolio management can help banks avoid the "double whammy" of large losses and the resulting earnings fluctuations that harm banks' share prices, he added.
Active portfolio management encompasses a wide array of both new and old tools and structures, such as advanced risk analysis and classification of individual loans, loan syndications and trading, use of credit derivatives, and geographic and industry diversification.
David G. Gibbons, the Office of the Comptroller of the Currency's new deputy comptroller for credit risk, endorsed thinking about whole portfolios but warned against losing sight of "the fundamentals of credit risk management."
"We are not convinced that past miscues were the result of obsolete risk management concepts," he said at a Robert Morris portfolio management conference Wednesday in New York. "Rather, we feel they resulted from a failure to practice the effective risk management principals of the day."
The two key principles of portfolio management, said Ronald D. Reading of First Manhattan Consulting, are the ability to quantify a bank's returns relative to risk and the "management of portfolio composition to improve that risk-return relationship."
Although putting portfolio management professionals and systems in place will be costly, said Chase's Mr. Strong, it will pay off for banks in the long run in the form of higher returns, lower losses, and higher equity multiples.
"It's prudent for risk managers at banks to prepare for the next downturn now, and portfolio management is one of the techniques we can use to do that," he said.
But beyond the particular tools banks can use for portfolio management, bankers and regulators both said that banks' credit cultures would have to change as well.
"The OCC believes that both bankers and regulators must move beyond transactional credit management and think in terms of portfolios and how to use aggregate portfolio concepts to measure and manage risk," said Mr. Gibbons, the deputy comptroller.
"We can no longer afford to view, manage, or examine the portfolio as if it were little more than a holding tank for numerous individual and unrelated transactions," he said.
The record growth of the syndicated loan market and increased liquidity of loans in the secondary market in recent years make syndication an increasingly efficient tool for portfolio management, said Michael H. Rushmore, managing director at BancAmerica Securities Inc. and head of its loan syndications and trading research group.
While the secondary loan market is dwarfed by the bond and stock markets, it is growing rapidly and will continue to do so as more banks adopt portfolio management, he added.
Wondering aloud whether portfolio management would help bankers ride out the tail end of the current business cycle, Allen W. Sanborn, president of RMA, asked those attending: "What might our problems have looked like in 1990 and 1991 if we had these portfolio management practices in place in 1986 or 1987?"
