What were US bankers smoking during the period 1990 and 2006?During that period, bankers cut their loan loss provisioning by about two thirds. Most of the decline occurred during 2002-06.
At the time, bankers must have thought that loan defaults were a thing of the past. No doubt, securitisation played a part, with bankers passing off their dodgy loans to gullible investment banks an institutional investors. With all the crap sitting somewhere else, bankers thought that they could economise on their loan loss provisioning.
Well, defaulting loans are back in fashion. Banks are now desperately trying to rebuild their provisioning in order to absorb the higher default rates.
With the US economy slipping into recession, it is a race against time.
2 comments:
Statistical modelling is the reason. As credit becomes easy then companies veering towards default can just borrow new money to repay the old. Therefore no default. Therefore default rates input into loss reserve calculations are lower.
They now discover that past performance does not predict future repayment.
I had precisely this issue on an audit earlier in the year
yo! alice...thought yo mite lak iss...
Splayed outwards through the suburbs, houses, houses for rest...
Seducingly rigged by the builder, half-tmbered houses with lips
pressed...
So tightly and eyes staring at the traffic through bleary haws...
And only a six-inch grip of the racing earth in their concrete
claws;
In these houses men as in a dream pursue the Platonic Forms...
With wireless and cairn terriers and gadgets approximating to
the fickle norms...
And endeavour to find God and score one over the neighbour...
By climbing tentatively upward on jerry-built beauty and
sweated labour.
from ‘BIRMINGHAM’ by Louis MacNeice : 1935
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