Bank credit officers this week urged their peers to adopt stronger risk-management tools, including computer models and credit-risk rating systems.
At the Robert Morris Associates annual conference here, bankers flocked to several "how-to" sessions on managing credit risk, where they were urged to end what some speakers called habitually passive risk management. About 600 bankers attended the Philadelphia-based trade group's gathering.
They talked about two ways their colleagues could take immediate action: double the number of risk-ratings assigned to loans (many banks have only five); and continually analyze a portfolio to produce a report or number reflecting its "risk-adjusted return on capital."
In other words, a bank needs to find out how well it is being paid for the risk it is taking.
Harry Golliday, a senior vice president of Crestar Bank, a unit of Crestar Financial Corp. in Richmond, Va., offered several models his bank uses to track the risk of loans in its $15 billion portfolio.
"I would say that 90% of problem loans weren't the result of a bad decision in the beginning" of the loan process, Mr. Golliday said. "Rather, it was something that had changed."
One way Crestar keeps its portfolio at a comfortable risk level, he said, was by aiming to keep it a double-A-rated credit. He said Crestar does that through a process of "portfolio-grooming."
Mr. Golliday said securities or loans are pared when there is not enough diversification by geography, industry type, credit product type, risk grade, and market segment.
Rufus King, an executive vice president and chief credit officer for First American National Corp., Nashville, pointed to statistics showing that many bankers are not doing enough to manage credit risk.
In 1997, a Robert Morris survey conducted by First Manhattan Consulting Group found that 19 of the 64 largest banks were considered passive in their portfolio management.
Those banks failed to do their own market-pricing research and held loans through maturity rather than engage in secondary market trading to groom portfolios. The banks also made minimal use of risk-adjusted-return tools.
Bankers here said they were more concerned about managing risk when their senior managements set performance goals for their banks' portfolios. Mr. Golliday said risk-management measurements would not eliminate the inherent risks in high-yielding loans or securities but they could help bankers diversify that risk.
In the end, Mr. Golliday said "if your ROE target is 18% to 20%-that seems to be the benchmark these days-you better have returns that are going to add up to that."
Elliot Asarnow, a managing director at ING Capital Advisors Inc., a subsidiary of ING Barings, stressed that thorough risk management is not easily accomplished. It could require intensive hiring, high compensation packages, and a lot of patience from senior managers.
When Mr. Asarnow put such systems in place at Citicorp, his former employer, "it was clear that in order to achieve anything, it was necessary to have senior management's blessing."
Therefore, Mr. Asarnow urged credit officers to gain "unwavering support from the top." He pointed out that once risk models are in place, they can offset "high-turnover and varying degrees of experience on staff."