Alan von Altendorf

Stress Testing: What's Your Bank's AQ?

Yves Smith at Naked Capitalism has a great post today:

"Banking has suffered a not-sufficiently-ackno... loss of know-how on the lending side. Back in the stone ages when I got an MBA, there were a few fellow students from big commercial banks like Chase (and no former investment banking analysts, the two year posts for college graduates) and they had all gone through credit training. But by the mid 1980s, the big end of town was fascinated with automated models and expert systems. American Express was considered the sophisticate of the crowd, allegedly with the most finely tuned program.

"Fast forward 20 plus years, and the credit card issuers formerly seen as most savvy, Amex and Capital One, now are sporting credit losses not markedly different than their peers. FICO based mortgage lending has proven to be a train wreck.

"The problem is that there isn't a good substitute for knowledge of the borrower and his community. Does he understand what he is getting into? How stable is his employer? What are the prospects for the local economy? Those are important considerations, and they require judgment. That may still in the end be used as an input to a more structured decision process. but overly automating borrower assessment has resulted in information loss. It's hardly a surprise that the quality of decisions deteriorated."