A firmer footing

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Investment banks have had a good time of it this year. Some markets - and mergers and acquisitions spring to mind - have been booming. Revenues are going through the roof, and bonuses are expected to be of bumper size. All at a time when interest rates have remained low, the credit environment has been benign, and equity volatility - with the exception of May and June - has been subdued.

Nonetheless, what's striking is that risk managers are all cautious. Virtually every risk manager interviewed by Risk this year - and certainly in the latter half of 2006 - has talked about the possibility of a change in the credit cycle or the dangers of a large-scale blow-up. And many are preparing for this eventuality.

Some banks have been taking advantage of tight credit spreads to ramp up their hedging activities. At the same time, strong demand for loan assets from the likes of hedge funds, insurance companies and collateralised loan obligation managers has given risk managers the impetus to offload loans from their balance sheets.

This has meant that credit portfolio management has become an increasingly important function within banks. Pioneered by the likes of Deutsche Bank and those other German banks so burnt by non-performing loans in the 1990s, several banks have established active credit portfolio management groups this year (see cover story, pages 18-21). The aim is to ensure that loans are priced on a firmer basis than relationship alone, and to make originators well aware of each client's profitability. Meanwhile, credit derivatives can be used to reduce concentrations and to diversify portfolios.

The introduction of Basel II from next month should make this sort of capital-focused, risk-sensitive approach even more important in the future. The surprise, in many respects, is that it's taken so long for these concepts to catch on.

Nick Sawyer, Editor.

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