In a prior blog I talked about a couple of reasons for having an external model versus having an internally designed model.  This is a follow-up to that first blog.  Many of the internal, commercial loan pricing models I have seen are developed to be “all encompassing”.  In other words they become so complicated that they are cumbersome to use and attempt to do more than they should be intended to do.  As a result the models aren’t used to the extent than can be and therefore don’t provide the h...

  If you have seen the movie “Annapolis”, you will know what I am talking about when I say someone is someone else’s “Mississippi”.  Well, the latest reasons for the financial rescue package are a congressman’s “Mississippi”.  By saying the financial industry needs more regulation congress has taken the heat off of themselves and placed it on the financial services industry.  There is always a need to have good oversight and indeed there are some areas that need improvement, but recent regulatio...

This is the first of a series of Blogs to address the tendency of financial institutions to develop in-house commercial loan pricing models versus adopting proven models available in the marketplace.  Up front I will tell you I am biased in seeking external models in that I have worked with the Hurdle Group, Inc. to make available to financial institutions an internet-based commercial loan pricing system.  The best methodologies available are instituted into the model, not biased by the internal...

Brokered versus retail certificates of deposit continues to be an issue with banks and with regulators.  Recently in a release by the FDIC (FIL84-2008), a reiteration by the regulators that they will monitor the use of brokered deposits even more closely than they have in the past.  It seems however, that the portion of the release dealing with cash flow has been minimized, while the term brokered becomes a bad word.  Here is the problem.  Local, retail CD’s with any lengthy duration are difficu...

It would be interesting to see how much time is being spent on each of the functions of lending in financial institutions in the current economic environment.  I think it would be fair to say that as little as two years ago a great deal of time was spent on the pricing discussion, along with credit quality.  Now, the sense is that there is much more time being spent on problem credits with little time being spent on the pricing side of the equation.  Tools are needed to assist in the pricing dec...

   This past week Pacific Coast Banking School (www.pcbsmi.org) finished its 70th year in fine fashion.  The school continues to provide excellent training for future financial executives and this year was no exception.  I have had the honor of serving on the faculty for 30 of those years and will continue to support the school in any way I can in the years to come.    Because of the economic times we are currently in, there was a feeling of concern among the students and faculty for the directi...

Many commercial loans are priced to meet the competition with little regard to the overall profitability to the institution.  Competition is certainly an important component, but should not be the only one.  To price to the competition is to say that the competition is pricing the loan appropriately to meet the needs of your institution, which is most probably not the case.  The appetite for loan growth, source of funding, amount of funding, credit standards, etc., are a few of the issues that m...

Consistency in commercial loan pricing is a big issue.  With equality in commercial loan pricing needed throughout a financial institution, a method is needed to measure one loan being priced with different characteristics than another loan.  As an example a loan being priced to float with prime with a relatively short duration, and a fixed rate loan with a long duration should be expected to yield the same return to the institution.  The calculations needed to ensure an equal comparison between...

Given the amount of credit risk on currently booked loans, the discussion as to the amount of credit cost that should be assigned newly originated individual commercial loans when being priced is up for discussion.  When credit risk cost is determined in a loan pricing system, it should be based on the average expected losses on loans of a given risk level, understanding that some of the loans may migrate from higher to lower levels of risk, or vice versa.  It can probably be said that loans boo...

Return on Asset or Return on Equity Measurements for Commercial Loan Pricing Whether the profitability of a specific commercial loan should be measured as a percent of the loan (return on asset) or as a percent of equity (return on equity) is an often asked question when using a loan pricing system.  If the same amount of equity is allocated to all loans being priced, it doesn’t matter simply because the mathematics makes them equal.  What does matter is if different loans have different amounts...