New York, NY – Portfolio managers gathered at the International Association of Credit Portfolio Managers’ 2009 Fall General Meeting this past week generally agreed the risk of financial meltdown appears over, and what lies ahead for the capital markets and the economy is difficult but familiar. Defaults remain a concern, so does the sluggish economy. Managers say that the wide systemic fear seen at the height of the crisis has passed, but they remain focused on managing credit and market risks amid the still volatile environment.
“No one thinks the road ahead will be easy or uncomplicated,” commented Som-lok Leung, Executive Director of the IACPM. “Our members have significant concerns but the near panic in the financial markets last winter appears to have dissipated. The concerns we face now are real but understandable.”
Credit portfolio managers met in New York City, November 17th and 18th to discuss a number of issues, including the economy, credit outlook, potential new regulation and changes affecting their profession. Credit portfolio managers are active in banks, insurance companies and other financial institutions and are typically responsible for managing risk and return in corporate loan portfolios. The meeting was sponsored by the IACPM which has more than 80 member firms globally.
In terms of managing risk, portfolio managers agree the credit crisis is substantially changing the way their firms view and manage their exposures. Managers say institutions need to view seemingly uncorrelated areas of risk, such as credit, liquidity or market risk, collectively instead of individually. They say firms need to take an enterprise view rather a silo approach, in which different types of risks are viewed in isolation.
Counterparty risk is a leading type of exposure that needs to be viewed collectively. For example, firms that held interest rate swaps with Lehman Brothers had to be concerned with not only ups and downs in the rate markets, they also had to be on top of the credit risk posed by Lehman. At the end of the day, some firms undoubtedly wish they had done a better job understanding the interrelated nature of the risks they faced.
“The credit crisis made it painfully clear that risk needs to be viewed across the board and collectively if firms are going to effectively manage it,” commented Mr. Leung. “Risks that might have been seen as unrelated turned out to be interconnected and missing the connections proved to be extremely damaging, even terminal in some cases.”
Portfolio managers also stress the importance of risk measurement in understanding a firm’s potential for losses. Accurate measurement can allow a firm to see exposures it might not see otherwise. Stress testing, for example, can help managers see potential cracks in their portfolios before they get out of control or inflict unanticipated damage.
Proper tools and techniques are also essential for managing credit risk. Credit portfolio managers emphasize the need for “front-end” tools or approaches which help institutions get a handle on risk right at the origination of a credit – in addition to strongly promoting liquidity for market-based risk management tools, such as credit default swaps or CDS.
The IACPM, with more than 80 member institutions located in 14 countries, is a professional association dedicated to the advancement of credit portfolio management. Founded in 2001, the organization’s programs of meetings, studies, research and colla-boration are designed to increase awareness of the value and function of credit portfolio management among financial markets worldwide, and to discuss and resolve issues of common interest to its members.