BofA becomes first Moody’s KMV CreditMark client

The decision by BofA to lead efforts in marking-to-market its loan portfolio is not surprising – the bank faced a stream of loan problems following its $62 billion merger with Nationsbank in 1998 that resulted in its share price falling from $78 in June 1998 to $36 in the last quarter of 2000. By March 2002, the bank had revived its share price to $62 following an extensive overhaul of its credit risk hedging tools and development of firm-wide, risk-based capital metrics, pushed by chief risk officer Amy Brinkley.

Brinkley told Risk last year that BofA had become “much more disciplined” in its corporate loan culture. “We weren’t getting paid for the risk we took on the corporate loan book so we have shifted from being a credit-originating bank to a distributing bank,” Brinkley said at the time. She was unavailable for comment today, but the use of CreditMark appears an extension of that philosophy.

Loan books are still measured by accrual accounting in the US, unlike trading books, which are marked-to-market. To take a holistic view of a bank’s entire portfolio in mark-to-market terms is viewed as benefiting overall risk management and lending discipline.

Moody’s KMV’s outgoing president and chief executive Peter Crosbie told RiskNews that a number of other financial institutions are piloting CreditMark, but declined to name them. But he added that these banks are using CreditMark on a daily basis in relation to both loan origination and transfer pricing in their portfolio management. “So they focus… much more on the potential size of the changes,” Crosbie said. “That is what customers use to measure and monitor their capital requirements.”

The development of CreditMark has taken more than a year.