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ABSTRACT
Although the subprime mortgage problems are not directly related to the business of commercial lending, there are
lessons to be learned. Robert McDowall, senior analyst, Europe, at financial services consultancy TowerGroup,
says that commercial banks should be aware of the issues that the subprime crisis raised and learn from them -
particularly as investment banking products are being packaged and distributed on a wider basis to commercial
banks. Although there are formulae for valuing intangible assets, they are models, and as McDowall points out, the
subprime mortgage crisis was caused in large part by banks marking to their models, rather than to the market.
The issues that affected the investment banking world are now permeating the commercial banking market, he
says. Credit risk - the risk that a counterparty may not be able to meet its obligations - is the main risk in the
commercial banking world. McDowall says that, in general, commercial banks have undertaken their own credit
assessments and then supplemented them with reports from rating agencies.
FULL TEXT
Risk management has not always been an equal player at the table in commercial banking, but Basel II and, more
recently, the subprime mortgage crisis in the US have pushed risk management up the agenda.
Although the subprime mortgage problems are not directly related to the business of commercial lending, there are
lessons to be learned. Robert McDowall, senior analyst, Europe, at financial services consultancy TowerGroup,
says that commercial banks should be aware of the issues that the subprime crisis raised and learn from them -
particularly as investment banking products are being packaged and distributed on a wider basis to commercial
banks.
Asset valuation
"Most commercial banking involves secured lending against something that is tangible, like property or assets. It is
up to the bank to ensure it knows where the assets are and to value them periodically. However, more and more,
banks are lending to organisations that do not have tangible assets and when you lend against intangibles (such
as intellectual property or patents), it is more difficult to value those assets continually and accurately," says Mr
McDowall.
Although there are formulae for valuing intangible assets, they are models, and as Mr McDowall points out, the
subprime mortgage crisis was caused in large part by banks marking to their models, rather than to the market.
"The issues that affected the investment banking world are now permeating the commercial banking market," he
DETAILS
Subject: Problem solving; Rating services; Commercial credit; Banking industry; Economic
crisis; Credit ratings; Credit risk; Banks; Risk management; Investment banking;
Subprime lending; Commercial banks; Financial institutions; Portfolio management;
Ratings &rankings
Business indexing term: Subject: Rating services Commercial credit Banking industry Economic crisis Credit
ratings Credit risk Banks Risk management Investment banking Subprime lending
Commercial banks Financial institutions Portfolio management; Industry: 56145 :
Credit Bureaus 52211 : Commercial Banking 52311 : Investment Banking and
Securities Dealing
Location: Europe
Pages: 1
Number of pages: 0
ISSN: 00055395
CODEN: BNKRB2
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