A once fearless stock market is now unnerved, as are many investors and bankers. Most predicted a market correction, but few expected it this fast and with such ferocity. Bank stocks have been hit particularly hard. While the Dow Jones has fallen over 15%, bank stocks suffered a more dramatic drop - some as much as 50% with an average of about 30%.
Since research has found that the market remains a leading indicator of future economic performance, now is the time for us all to ask some tough questions: What is the market telling banks about their loan portfolios, and what should we be doing about it?
On an industry-by-industry basis, investors are often a much harsher - and more timely - judge of changes in risk than is management. In early 1989, bank stocks began to slide and dropped significantly before the end of the year, well before a number of institutions publicly announced heavy losses and set aside considerable loan loss reserves.
Winning the Credit Cycle Game: A Roadmap For Adding Shareholder Value Through Credit Portfolio Management, a joint project of RMA and First Manhattan Consulting Group that RMA published last year, showed that the market rewarded the …