Where Is Risk Management Headed in 2010?

Analyst: Bill Bradway

January 18, 2010

In the shadows of the Financial Crisis Inquiry Commission’s first round of testimony, much of the banking industry is still adjusting to the consequences of the global credit crisis and failures (Lehman Brothers, Washington Mutual, Wachovia, Bear Stearns) or government takeover (Fannie Mae, Freddie Mac, AIG, GMAC) of very large institutions. Loan loss provisions are still running at historic highs and the severe economic recession has depressed employment levels and major industries (e.g., housing, auto).

The level of asset related charge offs and loan loss provisions for 2009 will amount to hundreds of $billion for US banks and thrifts. Costs associated with asset recovery and handling real estate owned properties are at historic highs too. Each of these components represents a discrete cost to an institution and affects earning capacity and capital ratios. Bottom up risk analysis at the loan or instrument level is usually aggregated to yield product level and geographic (or market) risk exposures.

This analysis explores how banks, thrifts and credit unions in the US will adjust their approach to risk management at the institution level. For example, how many institutions also analyze customer exposure?

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