| |
 |
 |
| |
 |
|
| Further Movement Towards More
Sophisticated Credit Risk Management Tools |
| With the recent rise in delinquencies, “holders” of loans / securities with embedded credit risk are exposed to value deterioration, resulting in potential impairment hits, increases in required capital reserves, and realization of losses resulting from foreclosures. The industry has typically focused on managing credit risk through (1) tighter underwriting standards and risk-based pricing, (2) sales / securitizations to move the risk off-balance sheet, and/or (3) “post-credit event” workout measures and other loss mitigation techniques. As the market proceeds past this latest credit cycle, financial institutions will begin to invest in more sophisticated on-going credit risk management tools designed to measure / quantify “potential” risk and help management institute risk mitigation techniques that will likely include the increased use of credit derivatives, credit insurance, and other instruments used in a similar capacity on the interest rate risk side of the industry. |
| |
| New Accounting Pronouncements
(FAS 159 FVO) and Regulations |
| The industry has been reeling from multiple
restatements emanating from wrongful implementation of
FAS 133 hedge accounting, FAS 91 level yield amortization,
FAS 140 sales vs. financing treatment, and FIN 46(r) consolidation
accounting. Companies are still defining and implementing
new procedures to satisfy these pronouncements. This trend
will continue with new pronouncements, although designed
to take away some of the complexity, that will require
implementation challenges in the short run. For example,
the new FAS 159 Fair Value Option will obviously focus
more on fair value accounting, however, for financial
institutions which generally manage business on a net
interest income basis, tracking loan and security cost
basis will continue. In addition, many financial institutions
are concerned about the volatility that would potentially
result from a pure fair value measurement. These new pronouncements,
along with other new expected regulations spawning from
the sub-prime market fallout, will continue to place greater
strain on financial institutions' back office processing
to quickly adapt. |
| |
| Continued Consolidations |
| The trend towards vertical mortgage integration and the excess cash holdings of large financial institutions will continue to push more mergers and acquisitions. Thinning margins and the need to diversify risk across various origination channels, collateral types, product offerings, and other attributes will force smaller niche firms to eventually be consumed by larger, more diversified institutions. |
| |
| Back Office Outsourcing and/or
Relocation |
| Cut costs, cut costs, and cut more costs. This trend will force companies to focus on what they do best…focus on front-end growth. In order to satisfy back office needs while keeping costs down, many companies will pursue outsourcing opportunities or relocation opportunities to lower cost regions. Although attractive for bottom line growth, employing such outsourcing strategies could be challenging to implement and challenging to realize such rewards quickly if not managed tightly. |
| |
| Increased Non-Traditional Products
(i.e. capitalize the word traditional) |
| Although the recent sub-prime market fallout
is putting pressure on reducing the number of non-traditional
products, we believe the proliferation of such products
will eventually continue to grow with more rigorous governance
on how they are marketed. The borrowing community is growing
in sophistication and is demanding more flexible borrowing
products that provide them more optionality. |
| |
Back
|  Next
Continue to Addressing Market Challenges |
|
|
|
