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FIRST CAPITAL BANK OF KENTUCKY
From: Mike Searcy [mailto:firstname.lastname@example.org]
The following comments are offered with respect to the "Interagency Proposal on the Classification of Commercial Credit Exposures". These comments are being submitted by an internal loan review officer of a state, non-member bank with less than $250MM in assets.
1&2) Could your institution implement the approach? If not, why? Yes, I believe our institution at <$250MM in assets could implement the new framework. However, we may need some guidance with respect to assigning a "numerical" scale to the proposed ratings in an effort to maintain the ability to denote the specific risk level of a loan on our internal systems, thereby making it convenient to easily track, monitor and report pools of loans in a particular risk category.
3. Implementation expenses? On the surface, I would anticipate implementation expenses to be minimal as we are a small institution. However, it may take 18-24 months to transition the entire commercial loan portfolio over to the new framework.
4. Significant training and programming costs? Training would certainly be warranted, but is not likely to generate significant costs. With respect to systems programming costs, again - it would depend on our ability to simply continue assigning numerical ratings to each of the resultant risk categories determined by an analysis of the "borrower" and "facility" dimensions.
5. Examples clear and ratings reasonable? Yes, examples were very clear. It was extremely helpful to see the various scenarios and how they would be rated under the new framework. It's hard to fathom that a loan in a "default" status could actually be assigned a "Pass" rating (such as in example #3), but it makes sense when you consider collateral and the true risk of loss.
6&7) More illustrative examples? Proposed treatment of guarantors reasonable? While the treatment of guarantors seems reasonable, an illustrative example might be helpful.
OTHER COMMENTS: For the most part, I would imagine that Bank's are going to find the proposed framework to be more desirable than the existing classification system, especially Sr. Mgmt and loan officers. As a former bank consultant, I know it is fairly common for there to be internal disagreements over the appropriate risk rating of a borrower whose financial condition has deteriorated to the point where cash flow is no longer sufficient to service debt and secondary sources of repayment are being relied upon - a "Substandard" credit by definition. However, the argument is always "Why should we have to assign a 15% general allocation to the reserve for this loan when (for example) we have a 50% LTV?" The new framework will clearly make a distinction between "substandard" assets with loss potential and those without - a more objective feature that I think will result in greater harmony with respect to identifying appropriate risk ratings.
Having said that, however, I would be very interested in knowing how the agencies' proposed framework will affect an examiners' analyses of the adequacy of the ALLL What would the new methodology look like for testing the adequacy of the ALLL? Would there still be some sort of general allocation assigned to the various pools of risk categories, much like the existing structure assigns 15% Sub, 50% Doubtful, 100% Loss? For example, will there be a general allocation assigned to assets designated as "Weak-Classified"? Or will the methodology be driven exclusively by the "facility" ratings and the severity of loss identified in "default" rated assets?
Michael S. Searcy
|Last Updated 03/30/2005||Regs@fdic.gov|