Credit portfolio investors unprepared for fresh crisis
About half of some 60 credit portfolio managers at banks and insurance companies are concerned their institutions do not have “systematic and sufficiently rigorous analytical cycle management” in place to withstand another credit crisis, according to new research.
In an annual survey, published yesterday, from three industry trade bodies in conjunction with management consultancy McKinsey & Company, some 50% of respondents said they were concerned over strength of credit management in the wake of the credit crunch.
Trade bodies the International Association of Credit Portfolio Managers, the International Swaps & Derivatives Association and The Risk Management Association conducted the survey to ascertain the credit portfolio practices used during the past nine volatile months.
Credit portfolio managers at financial institutions have traditionally been “buy and hold” investors, which meant making loans and holding them to maturity. However, so-called active credit portfolio management is more about originating, managing and selling-on, according to the IAPCM.
Som-lok Leung, executive director of the IACPM, said: “The credit crisis is the most dramatic test of active credit portfolio management since the system began to be practiced. The survey was conducted to fuel informed discussion over what should or should not be done to better manage risk and return.”
Robert Pickel, executive director and chief executive of ISDA, added: “Risk managers are taking a hard look at the new market realities and are attempting to reorient portfolio management to address new circumstances. Credit derivatives remain an important risk distribution tool for active credit portfolio managers.”
According to the survey, some 95% of credit portfolio managers believe their reputation for managing risk has strengthened during the credit crisis. The trade bodies said those that took part – institutions in Europe, Americas and Asia among others – represented more than half of all global banking assets.
While 50% are concerned about the strength of management and analysis, the trade bodies said a “significant number” of managers argue that current coverage and approaches are sufficient while “developing contingency plans is difficult given the unique natures of different crises.”
However, the trade bodies believe some analytical tools need to be improved, such as scenario analyses and stress tests, action plans to deal with unexpected events, quick reaction and execution to handle adverse market conditions, risk transparency of complex instruments and independent risk analysis separate from the rating agencies.
The IACPM was founded in 2001 and has 90 member institutions located in 16 countries.
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