The stress of margin compression, combined with the need to generate additional income to maintain investors' return on equity hurdles, are driving more and more community banks into riskier activities.
Regulators seem obsessed with preventing false negatives: loans that pass underwriting and then default. They should consider the costs of false positives, i.e., restricting loans that probably would perform fine.
Despite new standards, firms must be aware of how much often subjective judgment goes into mark-to-market accounting, particularly for non-standard financial products.
If you want to avoid catastrophic outcomes, don't rely on stress test models with hundreds of variables. Focus on finding the small number of factors that could individually precipitate failure.
If the JPMorgan Chase board docks CEO Jamie Dimon's compensation only for the London Whale's trading loss, he should consider himself fortunate that they are so myopic.
Expertise alone is insufficient without experience, and its byproduct: a "gut" feeling that enables a lender to separate the good credit applicant from the bad, the legitimate from the "con".
By downgrading the CRA rating of JPMorgan Chase, the OCC demonstrated it is capable of holding a major bank accountable for a deplorable record of serving the credit needs of low- and moderate-income communities.
This bad loan was a unique case of vanity and all-pervasive incompetence on the part of both the banker and a movie producer turned real estate developer.
