Market Risk, ALM, Funding and Liquidity Credit Technical Risk and Underwriting Insurance Risk, Underwriting and Actuarial Services Operational Risk Investment Risk Firmwide Risk Management Strategy Operations Business Transformation and Program Management Corporate Finance and M&A Regulatory and Compliance Basel2 and Solvency2 IT
Retail Banks Commercial Banks Investment Banks Asset Management Pension Funds Life Insurance Non-Life Insurance Corporate Treasury Private Equity
Our Client Services in 2007 Our Service Delivery Options in 2007 Training Secondment Consultancy Recruitment

A GlobeRisk Perspective on Commercial Banking

Commercial Banking has done extremely well in recent years but, in 2007 is walking on water.

Low inflation and low interest rates has led to significant asset inflation, financed by the banks on apparently attractive returns with credit default falling to all time lows within the western economies. Working capital lending has also been supported by moderate and stable economic growth.

On the acquisition funding side, sponsors have done very well as strong stock markets have delivered all the positive benefits of highly geared structures. However, with the exception of the UK and some European countries, stock market valuations are no longer attractive and a sharp decline will expose the negative aspects of geared borrowing.

This has already emerged for hedge funds (and some investment banks) in relation to sub prime mortgage backed investments, particularly where heavy gearing has been used.

In the last five years Banks have invested heavily in improved credit rating tools as part of the introduction of Basel2. In our view, whilst it is beyond doubt that a huge improvement has occurred in the "rank ordering" power of default rating tools, several major issues remain:

Portfolio management has seen a lot of attention in recent years. Unfortunately, rather like RAROC in the mid 1990's much portfolio management effort misses the point and organisations are not receiving good value. The key issues are

Finally, "everyone" knows that a lending business needs a credit department. Custom and Practice for credit departments and credit officers has developed over several years and operating model flexibility is well understood.

But...

Very few commercial banks have made any progress with two key questions?

(Issues in respect of credit derivative modelling are covered in our perspective on Investment Banks)

GlobeRisk has developed several consultancy services to assist banks as they address these issue areas

GlobeRisk has developed a suite of credit rating models. In each case the models integrate default likelihood, exposure measurement, collateral and other security and residual default:

To help banks with the optimisation of credit processes GlobeRisk has three services

From a Firmwide risk management perspective, GlobeRisk services include: