Thanks to JJ Hornblass at BankInnovation.net for bringing the Los Angeles Times story about Ken Lewis' intent to pay off Bank of America's TARP debts as soon as possible. While people may quibble over whether or not it's doable, all I can say is bravo sir.
In my comment on JJ's site I wrote, "There's absolutely no reason for a bank to retain TARP subsidies if they can effect a business strategy to configure assets and operations to go forward after paying them off. In fact I believe that's an essential mission challenge all banks that took TARP funds need to make part of their strategic planning. Banking is a highly competitive industry and global competition among the largest banks is hypercompetitive. That universe did not cease to exist when the United States legislated the current suite of laws into existence. Institutions saddled by government strings are disadvantaged in that universe. Mr. Lewis has his head on straight. An independent Bank of America is a better Bank of America. He's looking out for his shareholders and his depositors. If he can find a way to turn TARP into a short-term liability instead of an LBO more power to him."
Can Bank of America accomplish this? Based on the information we have in the IRA databases if any of the large banks can do this it's going to be BAC. It remains one of the strongest super-regional banks in our economy and we in our distillations of their Call Reports see the artifacts of an organized strategic plan to reign in their stray units quarter by quarter. Is it perfect? No. But what is in these times. Bank of America inherited some serious challenges as part of their 2008 acquisitions and Mr. Lewis is right to point out that there's some luck involved as to how the economy will evolve to making his dreams come true.
The bottom line is it's a plan that I personally believe benefits the National Interest. I wish you all the success in the world sir.
We respectfully suggest that other banks, particularly the better off mid-size and community banks, should take note of what Bank of America hopes to do. The next phase of this industry may not be centrally governed but instead highly competitive and possibly fratricidal. There's a lot of private capital out there just waiting to prove that the United States remains a nation with the means to pursue happiness. Speed and flexibility are strategic assets not to be underestimated.
***
Individual IRA Bank Reports can be purchased by anyone at http://us1.institutionalriskanalytics.com/Cart/Request.asp. You can use a credit card or PayPal.
We also invite qualified parties to contact us about our Advisory Services at info@institutionalriskanalytics.com.
Wednesday, March 25, 2009
Monday, March 23, 2009
Idle F’s: Asset-Rich Operationally-Stressed Banks
An emerging phenomenon is coming into the banking landscape. Banks are appearing that are capitally adequate but operationally stressed. These banks have low letter grade ratings driven by weak net incomes. They simultaneously exhibit strong capital adequacy test numbers and large unused credit capacities. In short, their lending engines have idled.
During the second and third quarters of 2008, banks were shutting down new lending as defaults rose and fear gripped the new loan landscape. Stress scenarios computing Maximum Probably Loss (MPL) in turn force many to allocate heavily into provisions for loss reserves further tightening credit availability. The process took several months but the lack of new lending production is now beginning to manifest as degraded interest and fee earnings on loans. That’s the primary source of transaction revenue in the banking industry. So even though these banks have capital, they have no revenue.
Essentially these banks have slipped back into what is effectively a de novo start up configuration. It’s well known that new banks are capital rich and revenue poor. Their business model challenge is to grow lending to reach profitable operational returns. In the Institutional Risk Analytics (IRA) system this tends to make a bank display a bank stress rating we call a “start-up F.” The business stress is real. There’s tremendous pressure on the bank to get the lending engine up and running on a timely basis. Our system generates a special flag for this condition. The logic that triggers flag is appearing for these older banks that have anemic lending.
We have not seen many older strong capital banks drop down into this “de novo like profile” as a phenomenon until recently. But now we believe as much as one quarter (1/4th) of the low rating grades population in our system may be exhibiting signs of underperforming lending engine stress.
The condition is worrisome because during 2008 we saw a number of FDIC resolutions centered precisely around banks that were still capitally adequate but displayed worsening operational stresses. The banks the FDIC resolved often displayed adequate regulatory capital but weak income statements and deepening loan loss trends. We optimized the IRA system to detect the very real threat of regulatory resolution action around this degrading safety and soundness condition.
It’s clear that some banks avoided further loan losses by decreasing or ceasing new loan production. The result was the Fall/Winter 2008 credit squeeze. Time moves on and now the stress has morphed. All bankers know that growing one’s lending base is a tedious process. You make good loans one at a time. So the institutional risk question is can they get their loan engines moving again?
These banks must address the business issue of competing for new lending to bring net income back on stream before cost of capital catches up with them. The fundamentals say these banks need to begin aggressively competing for new loans in order to build up their interest and fees sources of income. We’ve heard a number of anecdotal cases of this beginning to happen. We have adjusted our automated detectors to indicate when a bank is exhibiting this “restart/de novo challenge” condition in our reporting.
During the second and third quarters of 2008, banks were shutting down new lending as defaults rose and fear gripped the new loan landscape. Stress scenarios computing Maximum Probably Loss (MPL) in turn force many to allocate heavily into provisions for loss reserves further tightening credit availability. The process took several months but the lack of new lending production is now beginning to manifest as degraded interest and fee earnings on loans. That’s the primary source of transaction revenue in the banking industry. So even though these banks have capital, they have no revenue.
Essentially these banks have slipped back into what is effectively a de novo start up configuration. It’s well known that new banks are capital rich and revenue poor. Their business model challenge is to grow lending to reach profitable operational returns. In the Institutional Risk Analytics (IRA) system this tends to make a bank display a bank stress rating we call a “start-up F.” The business stress is real. There’s tremendous pressure on the bank to get the lending engine up and running on a timely basis. Our system generates a special flag for this condition. The logic that triggers flag is appearing for these older banks that have anemic lending.
We have not seen many older strong capital banks drop down into this “de novo like profile” as a phenomenon until recently. But now we believe as much as one quarter (1/4th) of the low rating grades population in our system may be exhibiting signs of underperforming lending engine stress.
The condition is worrisome because during 2008 we saw a number of FDIC resolutions centered precisely around banks that were still capitally adequate but displayed worsening operational stresses. The banks the FDIC resolved often displayed adequate regulatory capital but weak income statements and deepening loan loss trends. We optimized the IRA system to detect the very real threat of regulatory resolution action around this degrading safety and soundness condition.
It’s clear that some banks avoided further loan losses by decreasing or ceasing new loan production. The result was the Fall/Winter 2008 credit squeeze. Time moves on and now the stress has morphed. All bankers know that growing one’s lending base is a tedious process. You make good loans one at a time. So the institutional risk question is can they get their loan engines moving again?
These banks must address the business issue of competing for new lending to bring net income back on stream before cost of capital catches up with them. The fundamentals say these banks need to begin aggressively competing for new loans in order to build up their interest and fees sources of income. We’ve heard a number of anecdotal cases of this beginning to happen. We have adjusted our automated detectors to indicate when a bank is exhibiting this “restart/de novo challenge” condition in our reporting.
Monday, March 9, 2009
Tangible Common Equity: Useful Tool or Wild Goose Chase
T.C.E. has suddenly become one of those vogue things everyone wants to know more about. Pundits have begun asking, some proclaiming, about the notion of T.C.E. becoming the “new Tier 1 Capital” for investors. In a world where wiping out equity investors is rapidly becoming a “too bad for you buddy” event as the banking community strives to bankrupt common equity to protect pay off losses over in the neighboring fixed income casino, people are right to ask the question.
But what is the real T.C.E. condition of these banks. An equity investor sees their investment through the eyes of the Securities Act. They buy stock through a market regulated by the Securities and Exchange Commission (SEC). They analyze their investments looking at the whole entity which in the most complex institutions is only partially a regulated bank.
For those of you who don’t know this, the regulated bank portion of your stock is overseen by an entirely different set of regulators operating under the authority of the Banking Act. The Securities Act and the Banking Act are immiscible. They do not interact. The identification numbers at the SEC and the FDIC are separate lists. There are 885 publicly traded banks and over 5,000 bank holding companies. So for over 80% of the banking industry, publicly traded stock price doesn’t figure anywhere in the analysis. And it’s the bank regulators who hold the power of U.S. law when it comes to capital adequacy. It’s their equations that govern what is enough, when prompt corrective action is required and when resolution is necessary. The computations are specific and they are not based on reading 10-K’s.
There are a number of T.C.E. figures floating around right now and we thought it would be a good idea to assess whether these are in fact helping public transparency or distorting it. The most common one we’ve found is the simplistic method. It’s,
T.C.E = (Common Equity less Intangible Assets) divided by (Total Assets less Intangible Assets)
These numbers are found in SEC 10K’s and are part of the standard 800 or so fundamental variables in all of the vended data feeds. It’s quick to calculate and it gives reasonable data for banks with business models that are primarily in the basic business of banking. It begins to distort as the bank participates in exposures to external risk sensitive activities such as trading and securities that are better tracked using Economic Capital (EC) analysis. And it can be as much as 200% to 400% off the mark for large complex multinational public companies with portfolios of operations that include significant portions of non-banking lines of business. For this last set of companies you really do have to separate them in to their bank and non-bank components and analyze the risk of each using differing techniques and then make the equity decision. Yes it’s more complex that quick glancing at the 10K and watching the price-volume but we’re in a brave new world and the winners are going to be the ones that figure out the new math.
Take poor Citigroup. I saw an article with a table indicating Citi’s T.C.E. was down to 1.8%. We ran the simplified formula for Citi and came up with 1.78% for 3Q2008 pulling figures from the 10-Q's matching the number from the source quoted in the articles. The figure is alarming because the conventional rule about T.C.E. is that it should be 3% of higher to be “adequate” from a banking safety and soundness perspective. The outcome of the equation puts quite a bit of “market” pressure on Citi to say the least. Adding insult to injury, it also opens up an arbitrage gap. The question in the end of course, is it real?
At the moment we’re not so sure at IRA because certain cross checks don’t fit. The three official tests of Capital Adequacy(1) for the Citi’s banking operations all show that this portion of the business is capitally adequate. Citi does carry a high degree of stress in our Bank Stress Rating system but it’s not because of any regulatory capital adequacy issues. Their loss provisions are in line with the Maximum Probable Loss (MPL) stress factors in our system so it looks like their operations scenario planning is being done properly as far as capital reserve positioning is concerned. So we ran a version of a bank operations-only T.C.E. and came up with a figure of 5.53% for Citi at the end of 4Q2008. This last figure for the bank portion of Citi agrees better with the regulatory indicators from the three official Capital Adequacy tests. We remain a little wary because the oddball number out of the lot is the simple calc TCE.
If all the numbers are true one thing it might imply is that the interests of the banking regulators, counterparties, et al and the interests of equity shareholders are not aligned by a conflict ratio of 3-to-1. That gets kind of interesting when the two become one.
Bottom Line
I’m not saying that banks like Citi don’t have their share of challenges. They certainly do and yes they are scary daunting. But what I am saying is that they, the other banks, and this country’s economy do not need imaginary ones. In these times, we need to be sure the dots are connecting.
Note : The three official regulatory tests for bank capital adequacy are as follows,
a. Tier 1 Leverage Capital Ratio must be greater than 5%.
b. Tier 1 Risk Based Capital must be greater than 6% of Total Risk Weighted Assets.
c. Total Risk Based Capital must be greater than 10% of Total Risk Weighted Assets.
If you want to see IRA's Bank Stress Ratings reports you can buy them here. http://us1.institutionalriskanalytics.com/Cart/Request.asp.
But what is the real T.C.E. condition of these banks. An equity investor sees their investment through the eyes of the Securities Act. They buy stock through a market regulated by the Securities and Exchange Commission (SEC). They analyze their investments looking at the whole entity which in the most complex institutions is only partially a regulated bank.
For those of you who don’t know this, the regulated bank portion of your stock is overseen by an entirely different set of regulators operating under the authority of the Banking Act. The Securities Act and the Banking Act are immiscible. They do not interact. The identification numbers at the SEC and the FDIC are separate lists. There are 885 publicly traded banks and over 5,000 bank holding companies. So for over 80% of the banking industry, publicly traded stock price doesn’t figure anywhere in the analysis. And it’s the bank regulators who hold the power of U.S. law when it comes to capital adequacy. It’s their equations that govern what is enough, when prompt corrective action is required and when resolution is necessary. The computations are specific and they are not based on reading 10-K’s.
There are a number of T.C.E. figures floating around right now and we thought it would be a good idea to assess whether these are in fact helping public transparency or distorting it. The most common one we’ve found is the simplistic method. It’s,
T.C.E = (Common Equity less Intangible Assets) divided by (Total Assets less Intangible Assets)
These numbers are found in SEC 10K’s and are part of the standard 800 or so fundamental variables in all of the vended data feeds. It’s quick to calculate and it gives reasonable data for banks with business models that are primarily in the basic business of banking. It begins to distort as the bank participates in exposures to external risk sensitive activities such as trading and securities that are better tracked using Economic Capital (EC) analysis. And it can be as much as 200% to 400% off the mark for large complex multinational public companies with portfolios of operations that include significant portions of non-banking lines of business. For this last set of companies you really do have to separate them in to their bank and non-bank components and analyze the risk of each using differing techniques and then make the equity decision. Yes it’s more complex that quick glancing at the 10K and watching the price-volume but we’re in a brave new world and the winners are going to be the ones that figure out the new math.
Take poor Citigroup. I saw an article with a table indicating Citi’s T.C.E. was down to 1.8%. We ran the simplified formula for Citi and came up with 1.78% for 3Q2008 pulling figures from the 10-Q's matching the number from the source quoted in the articles. The figure is alarming because the conventional rule about T.C.E. is that it should be 3% of higher to be “adequate” from a banking safety and soundness perspective. The outcome of the equation puts quite a bit of “market” pressure on Citi to say the least. Adding insult to injury, it also opens up an arbitrage gap. The question in the end of course, is it real?
At the moment we’re not so sure at IRA because certain cross checks don’t fit. The three official tests of Capital Adequacy(1) for the Citi’s banking operations all show that this portion of the business is capitally adequate. Citi does carry a high degree of stress in our Bank Stress Rating system but it’s not because of any regulatory capital adequacy issues. Their loss provisions are in line with the Maximum Probable Loss (MPL) stress factors in our system so it looks like their operations scenario planning is being done properly as far as capital reserve positioning is concerned. So we ran a version of a bank operations-only T.C.E. and came up with a figure of 5.53% for Citi at the end of 4Q2008. This last figure for the bank portion of Citi agrees better with the regulatory indicators from the three official Capital Adequacy tests. We remain a little wary because the oddball number out of the lot is the simple calc TCE.
If all the numbers are true one thing it might imply is that the interests of the banking regulators, counterparties, et al and the interests of equity shareholders are not aligned by a conflict ratio of 3-to-1. That gets kind of interesting when the two become one.
Bottom Line
I’m not saying that banks like Citi don’t have their share of challenges. They certainly do and yes they are scary daunting. But what I am saying is that they, the other banks, and this country’s economy do not need imaginary ones. In these times, we need to be sure the dots are connecting.
Note : The three official regulatory tests for bank capital adequacy are as follows,
a. Tier 1 Leverage Capital Ratio must be greater than 5%.
b. Tier 1 Risk Based Capital must be greater than 6% of Total Risk Weighted Assets.
c. Total Risk Based Capital must be greater than 10% of Total Risk Weighted Assets.
If you want to see IRA's Bank Stress Ratings reports you can buy them here. http://us1.institutionalriskanalytics.com/Cart/Request.asp.
Wednesday, March 4, 2009
Stress Testing Banks
About 18 months ago we were showing our then newly minted Economic Capital and RAROC computations to one of the banking regulators. Calibrate in your head what the world was like back then. It was one of those big phone calls with lots of analysts. Objections were raised due to the fact that the IRA method arbitrarily set the cutoff point for EC’s analysis at the B or better rating bond equivalent, that’s roughly 1,000 basis points (bp) maximum allowable loss. Looking at the output, the following ensued,
Unknown voice: “Dennis if your numbers are correct it would mean that there’s no way some of these large banks could possibly stay in business.”
My response, “Yes it does indeed question their viability.”
Next question, “So will you change your numbers?”
Response, “No we will not. I believe the numbers are correct.”
I went on to explain that we had in fact “parametrically stressed” the Economic Capital factors as an exercise to locate the point where one would again get analytical indications of business viability for some of these larger vulnerable institutions. Our findings were that the allowable loss margin threshold needed to be raised to around 3,000 bp to make that happen. I reminded everyone that the cutoff between investment grade and junk was around 2,800 bp, the term toxic was not yet in vogue. This was simply not “real world viable” as a modeling ground rule. Doing so would imply that IRA would be buying into sanctioning operational and strategic policies saying a banking industry averaging at least as risky as a junk bond was "normal". That’s just far too much rope to give to banking institutions that are supposed to operate safely and soundly. The notion fails the common sense test.
Silence. That pretty much ended that phone call.
Now some stress testing numbers to keep in mind.
Why bring this up?
The U.S. government is working on creating stress tests for a group of supposedly "mission critical" banks. There's a rule in analysis that when in doubt people do what they know. You have to watch out for that. Given the people working on this there's a good chance that the risk-stress methodology is likely unique per bank akin to the construction of an elaborate (that usually means opaque) boutique multi-asset class security with many of the risk inputs supplied by statistics provided by the bank being examined. Basel II called this type of thing the Internal Research Based (IRB) approach.
Some reminders are in order. IRB was meant for use by healthy institutions able to prove the empirical validity of their inputs and the stability and accuracy of their methods. Also IRB's are supposed to be accompanied by external research benchmarks and include an explanation of the differences, if any. The process is meant to promote counterparty confidence.
Unknown voice: “Dennis if your numbers are correct it would mean that there’s no way some of these large banks could possibly stay in business.”
My response, “Yes it does indeed question their viability.”
Next question, “So will you change your numbers?”
Response, “No we will not. I believe the numbers are correct.”
I went on to explain that we had in fact “parametrically stressed” the Economic Capital factors as an exercise to locate the point where one would again get analytical indications of business viability for some of these larger vulnerable institutions. Our findings were that the allowable loss margin threshold needed to be raised to around 3,000 bp to make that happen. I reminded everyone that the cutoff between investment grade and junk was around 2,800 bp, the term toxic was not yet in vogue. This was simply not “real world viable” as a modeling ground rule. Doing so would imply that IRA would be buying into sanctioning operational and strategic policies saying a banking industry averaging at least as risky as a junk bond was "normal". That’s just far too much rope to give to banking institutions that are supposed to operate safely and soundly. The notion fails the common sense test.
Silence. That pretty much ended that phone call.
Now some stress testing numbers to keep in mind.
- There are rougly 885 publicly traded banks.
- There are around 5,000 regulated bank holding companies.
- There are 8,500'ish individual FDIC reporting bank units.
- IRA publishes a detailed Bank Stress Rating for every one of the above for every quarter going back to 1995.
- Each bank is tested using identical criteria.
- The most recent reports cover the operating period ended December 31, 2008. Anyone can buy one for $50.00 on our website.
- Our indexing methodology uses an analytical census of all active institutions in order to locate accurate behavior distributions.
Why bring this up?
The U.S. government is working on creating stress tests for a group of supposedly "mission critical" banks. There's a rule in analysis that when in doubt people do what they know. You have to watch out for that. Given the people working on this there's a good chance that the risk-stress methodology is likely unique per bank akin to the construction of an elaborate (that usually means opaque) boutique multi-asset class security with many of the risk inputs supplied by statistics provided by the bank being examined. Basel II called this type of thing the Internal Research Based (IRB) approach.
Some reminders are in order. IRB was meant for use by healthy institutions able to prove the empirical validity of their inputs and the stability and accuracy of their methods. Also IRB's are supposed to be accompanied by external research benchmarks and include an explanation of the differences, if any. The process is meant to promote counterparty confidence.
Wednesday, February 11, 2009
Surveillance 101: Tracking bank degradations over time.
Case Study: Alliance Bank of Culver City, California
Alliance Bank was taken over by the FDIC last week and the assets sent to California Bank & Trust, a unit of Zions Bank. The Alliance case was typical case of a small institution that got trapped in the aftermath of a deflating bubble. It ended life the owner of a growing portfolio of foreclosed properties stemming from a lending default rate dragging operational earnings deep into the negative. Their Aggregate Loan Default Rate went from a miniscule 26bp (basis points) to 496bp and their Loss Given Default rate was 96%.
As it has been doing with regularity, the FDIC performed it's designated regulatory function taking the troubled entity into the arms of a better positioned and healthier financial institution. In fact, the degradation of Alliance's position took approximately nine months to gestate. The bank's overall stress ratings over time are shown below.
IRA Bank Stress Ratings: Alliance Bank, Culver City, CA
Sep-08 - F
Jun-08 - F
Mar-08 - B
Dec-07 - A
Sep-07 - A+
Like many other institutions who were caught in the bubble a migration of business from income producing to dead weight ensued. Non-Conforming assets went from $17.7M in Sep-07 to $96.5M in Sep-08. During the same time Real Estate Owned(REO) went from $1.1M to $16.6M.
Note: I was interviewed about Alliance on Monday by KNBC-TV Los Angeles. The segment aired on Tuesday Feb. 10.
Alliance Bank was taken over by the FDIC last week and the assets sent to California Bank & Trust, a unit of Zions Bank. The Alliance case was typical case of a small institution that got trapped in the aftermath of a deflating bubble. It ended life the owner of a growing portfolio of foreclosed properties stemming from a lending default rate dragging operational earnings deep into the negative. Their Aggregate Loan Default Rate went from a miniscule 26bp (basis points) to 496bp and their Loss Given Default rate was 96%.
As it has been doing with regularity, the FDIC performed it's designated regulatory function taking the troubled entity into the arms of a better positioned and healthier financial institution. In fact, the degradation of Alliance's position took approximately nine months to gestate. The bank's overall stress ratings over time are shown below.
IRA Bank Stress Ratings: Alliance Bank, Culver City, CA
Sep-08 - F
Jun-08 - F
Mar-08 - B
Dec-07 - A
Sep-07 - A+
Like many other institutions who were caught in the bubble a migration of business from income producing to dead weight ensued. Non-Conforming assets went from $17.7M in Sep-07 to $96.5M in Sep-08. During the same time Real Estate Owned(REO) went from $1.1M to $16.6M.
Note: I was interviewed about Alliance on Monday by KNBC-TV Los Angeles. The segment aired on Tuesday Feb. 10.
Wednesday, February 4, 2009
IRA Bank Reports Timing - Why Mid-Quarter?
IRA reports are based on FDIC CALL/TFR Reports. We need these more detailed reports to accomplish the level of bank safety and soundness analysis that we do. Bear in mind that IRA’s bank analytics covers all FDIC reporting institutions. Of these only some are publicly traded companies. Our analysis engines run detailed analytics on the universe of active U.S. bank holding companies as well as the individual unit institution members of a holding company.
Timing of production is keyed to the FDIC’s internal processing schedules. The FDIC holds release of the master dataset for each quarter’s filings for 45 days to perform internal cleaning prior to releasing it for analytics use. We get the data and process it to build the industry stress statistics typically just before the FDIC does its’ mid-quarter press conference. We try to release our reports to coincide with the FDIC conference date provided the FDIC arrived on time. An email is sent to all clients informing you that the reports have been updated.
FYI, catalogs of SEC filings for public companies are available on the IRA website. SEC filings contain top level information on companies aimed primarily at stock investors. They typically begin to appear just before the 30 day point after the end of the reporting period, hence the end of month follies in the markets. That’s a little ahead of the FDIC’s much more comprehensive data needed for safety and soundness analysis on banks to help assess the risk within a person/company’s cash and cash equivalents assets. Different portion of the wealth portfolio.
- Dennis
Timing of production is keyed to the FDIC’s internal processing schedules. The FDIC holds release of the master dataset for each quarter’s filings for 45 days to perform internal cleaning prior to releasing it for analytics use. We get the data and process it to build the industry stress statistics typically just before the FDIC does its’ mid-quarter press conference. We try to release our reports to coincide with the FDIC conference date provided the FDIC arrived on time. An email is sent to all clients informing you that the reports have been updated.
FYI, catalogs of SEC filings for public companies are available on the IRA website. SEC filings contain top level information on companies aimed primarily at stock investors. They typically begin to appear just before the 30 day point after the end of the reporting period, hence the end of month follies in the markets. That’s a little ahead of the FDIC’s much more comprehensive data needed for safety and soundness analysis on banks to help assess the risk within a person/company’s cash and cash equivalents assets. Different portion of the wealth portfolio.
- Dennis
Wednesday, January 28, 2009
The thing about economics ...
Humans are creatures of hope. It occurs to me that we place too much blind faith in things sometimes. Take economics. The thing about macro models is that they depend on input that has been smoothed and homogenized far below the noise levels of real life. Sort of like smoothing loan collateral pool risk into simplified spreadsheet factors. Economics too often depends on the systems finding balance presuming computational isolation from discontinuitues, externalities and outliers. The law of unintended consequences always applies when we simplify. Murphy's leverage is amplified by the alchemy of theories reaching far beyond their stable linearity. When you hear someone say "it's not perfect but it's better than nothing" that's the sound of a match being lit in a room full of dynamite. Sometimes we forget that we are the monkeys with keyboards trying to write Shakespeare.
So here's one for you to ponder. The same colleges that train some of the best economists also train some of "the best" structured finance designers. It's the same math. I'm just sayin'.
- D
So here's one for you to ponder. The same colleges that train some of the best economists also train some of "the best" structured finance designers. It's the same math. I'm just sayin'.
- D
Thursday, January 15, 2009
TARP and Tangibles
Here's something interesting. We computed the IRA Tangible Equity Capital Ratios for Largest Bank Holding Companies
. The link takes you to an excel file containing four worksheets covering 3Q2008 and year-end for 2007, 2006 and 2005.
The technique for this requires rolling up the bank only assets of each of the units of a BHC to make the computation. We actually set the computers up to run the metric for all 5,000 or so bank holding companies for every reporting quarter we have in our databases. Naturally the popular press seems fixated on the top tier. The "Prime Solution" for the U.S. economy probably lies in deploying TARP money among the best of breed of the 5,000 though.
Enjoy the peek at the tip of the iceberg.
- Dennis
. The link takes you to an excel file containing four worksheets covering 3Q2008 and year-end for 2007, 2006 and 2005.
The technique for this requires rolling up the bank only assets of each of the units of a BHC to make the computation. We actually set the computers up to run the metric for all 5,000 or so bank holding companies for every reporting quarter we have in our databases. Naturally the popular press seems fixated on the top tier. The "Prime Solution" for the U.S. economy probably lies in deploying TARP money among the best of breed of the 5,000 though.
Enjoy the peek at the tip of the iceberg.
- Dennis
Tuesday, January 13, 2009
IRA Bank Stress Ratings. Why Letter Grades?
Professional bankers live and die by their CAMELS rating. The system uses a grading method ranging from 1 to 5 (1 = best) and is used as part of official interactions between the bank and its' regulator. The six factors in a CAMELS are,
C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
CAMELS include privileged information on objective numerics, subjective discussion and judgement and external exposure analysis measures that help the regulator determine whether a bank is being run adequatetely or requires prompt corrective intervention.
Pattern Analysis to find "The Signal in the Noise"
IRA analysis uses publicly available information to perform similar analyses to the CAMELS process but using an outside observer approach. We opted to design a system that concentrates on bank stress indicators because this is what "main street Americans" actually worry about.
Unless one is a regulator, it's impossible to talk in detail to every bank in the United States. So we designed a more clinical statistical analysis approach to characterize behavior patterns at the census level (looking at all FDIC filers ... yes all!) to replace one-on-one subjectivity. The objective of our system is to allow a consumer to locate a bank's performance both in terms fundamental safety and soundness and in competitive context with its' peers. We believe this improves transparency for depositors as well as the decision matrix process for investors.
Why letter grades?
When we looked at how to set up the final grading scale we were sensitized to the need to make the grading system intuitive for consumers by the media. So instead of emulating the CAMELS 1 to 5 scale we opted for the more familiar report card of A to F letter grades.
In the CAMELS system a bank is considered well run if it has an overall CAMELS rating of 2 or lower and has issues if that rating slips to 3 or higher. Anecdotal comparisons to the IRA Bank Stress Index rating system indicate that one can expect the following,
IRA A+ generally finds banks with CAMELS 1
IRA A finds banks with CAMELS 1 and 2
IRA B finds banks with CAMELS 2 and 3
IRA C thru F corresponds to banks with CAMELS ranging from 3 to 5
CAMELS ratings seem to move more slowly than IRA Risk Ratings which are computed on a per period basis algorithmically. This makes sense given that CAMELS involve deeper private information examinations of an institution to complete.
We think the IRA rating may function like a leading indicator but it's hard to tell because one cannot get a look at all the CAMELS and their inputs unless one is at the FDIC. We do have the structure of the EXAM table in our computers, but not the content. Doesn't matter. If we did the law is such that we could only show the results to the regulators anyway.
- D
C - Capital adequacy
A - Asset quality
M - Management quality
E - Earnings
L - Liquidity
S - Sensitivity to Market Risk
CAMELS include privileged information on objective numerics, subjective discussion and judgement and external exposure analysis measures that help the regulator determine whether a bank is being run adequatetely or requires prompt corrective intervention.
Pattern Analysis to find "The Signal in the Noise"
IRA analysis uses publicly available information to perform similar analyses to the CAMELS process but using an outside observer approach. We opted to design a system that concentrates on bank stress indicators because this is what "main street Americans" actually worry about.
Unless one is a regulator, it's impossible to talk in detail to every bank in the United States. So we designed a more clinical statistical analysis approach to characterize behavior patterns at the census level (looking at all FDIC filers ... yes all!) to replace one-on-one subjectivity. The objective of our system is to allow a consumer to locate a bank's performance both in terms fundamental safety and soundness and in competitive context with its' peers. We believe this improves transparency for depositors as well as the decision matrix process for investors.
Why letter grades?
When we looked at how to set up the final grading scale we were sensitized to the need to make the grading system intuitive for consumers by the media. So instead of emulating the CAMELS 1 to 5 scale we opted for the more familiar report card of A to F letter grades.
In the CAMELS system a bank is considered well run if it has an overall CAMELS rating of 2 or lower and has issues if that rating slips to 3 or higher. Anecdotal comparisons to the IRA Bank Stress Index rating system indicate that one can expect the following,
IRA A+ generally finds banks with CAMELS 1
IRA A finds banks with CAMELS 1 and 2
IRA B finds banks with CAMELS 2 and 3
IRA C thru F corresponds to banks with CAMELS ranging from 3 to 5
CAMELS ratings seem to move more slowly than IRA Risk Ratings which are computed on a per period basis algorithmically. This makes sense given that CAMELS involve deeper private information examinations of an institution to complete.
We think the IRA rating may function like a leading indicator but it's hard to tell because one cannot get a look at all the CAMELS and their inputs unless one is at the FDIC. We do have the structure of the EXAM table in our computers, but not the content. Doesn't matter. If we did the law is such that we could only show the results to the regulators anyway.
- D
Subscribe to:
Posts (Atom)