Kamakura Launches Troubled Bank Index for
All Banks Insured by the FDIC
NEW YORK, January 17, 2018: Kamakura Corporation announced today that it is launching a Troubled Bank Index covering all banks insured by the Federal Deposit Insurance Corporation. The index follows on the success of Kamakura’s Troubled Company Index which covers 39,000 public firms in 68 countries, with a history back to January 1990. The Kamakura Troubled Bank Index has a history that dates from December, 1992 to the present. The all-time high in the Troubled Bank Index was 56.84% on October 31, 2008 at the height of the recent credit crisis. The all-time average value for the index was 4.78%. The index measures the percent of banks insured by the FDIC which have an annualized 1-month default in excess of 1%. The current value of the index is 0.24%, up 0.01% in the last month but well below the long-term average. The number of banks covered by the index is 5,736 as of today. Default probabilities for each of the banks are available to KRIS subscribers as part of Kamakura’s U.S. Bank Model.
Kamakura launched the index in response to demand from clients who have relied heavily on the Kamakura Troubled Company Index for public firms. Kamakura Corporation is concerned about references to credit default swap “quotes” as a basis for assessing the credit quality of both commercial banks and other corporations. During the 2010 through 2017 period when the Depository Trust & Clearing Corporation (DTCC) was releasing weekly credit default swap trading volumes publicly, there were credit default swap trades on only 13 U.S. commercial banking legal entities as documented in this analysis from Kamakura Corporation. Moreover, Kamakura’s Managing Director for Research Prof. Robert Jarrow has described the serious errors made by market participants in trying to extract market-implied default probabilities from credit default swap quotes (which are almost always backed by no trades). Those articles appeared in the Journal of Fixed Income (2012) and CreditFlux (2012). Because there are no publicly available traded prices for U.S. commercial bank credit default swaps and no publicly available volume data, any implication that CDS quotes contain actionable information is false.
The ten U.S. banks with the highest 1-year default probabilities are shown below:
“There is an old adage defining war as ‘months of boredom punctuated by moments of terror’. If you were responsible for bank counterparty risk on September 15, 2008 you understood that moment of fear while today we are back to the boredom stage. The bank troubled company index graphically demonstrates these cycles. More importantly for credit managers new to the job the most important tool in managing risk is early warning and moreover the accuracy of that warning. The introduction of Kamakura Troubled Bank Index provides the history, trends and trajectory that help you manage the risk and not simply react to it.”
About the Troubled Bank Index The Kamakura Troubled Bank Index measures the percentage of commercial banks insured by the Federal Deposit Insurance Corporation in the United States that have an annualized one-month default risk of over one percent. The Kamakura bank index uses the annualized one-month default probability produced by the KRIS version 1.0 U.S. Bank reduced form default probability model, a formula that bases default predictions on a sophisticated combination of financial ratios and macro-economic factors.
A complete technical guide, including full model test results and parameters, is provided to subscribers to the U.S. Bank Model. The KRIS service also includes a wide array of other default probability models that can be seamlessly loaded into Kamakura’s state-of-the-art enterprise risk management software engine, Kamakura Risk Manager. Available default models include the public firm model, the non-public-firm default model, the commercial real estate model, and the sovereign model. Macro factor parameter subscriptions include Heath, Jarrow, and Morton term structure models for government securities in the U.S., Germany, the UK, Canada, Spain, Sweden, Australia, Japan, Thailand, and Singapore. All parameters are derived in a no-arbitrage manner consistent with seminal papers by Heath, Jarrow, and Morton, as well as Amin and Jarrow. A KRIS Macro Factor Scenario Service subscription includes both risk-neutral and “real world” empirical scenarios for interest rates and macro factors.
To follow the Troubled Bank Index and other risk commentary by Kamakura on a daily basis, please follow:
Kamakura CEO Dr. Donald van Deventer (www.twitter.com/dvandeventer)
Kamakura President Martin Zorn (www.twitter.com/riskmgrhi) and
Kamakura’s official twitter account (www.twitter.com/KamakuraCo).
About Kamakura Corporation
Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing, and software. Kamakura was named to the World Finance 100 by the editor and readers of World Finance magazine in 2017,2016 and 2012. In 2010, Kamakura was the only vendor to win two Credit Magazine innovation awards. Kamakura Risk Manager, first sold commercially in 1993 and now in version 10, is the first enterprise risk management system for users focused on credit risk, asset and liability management, market risk, stress testing, liquidity risk, counterparty credit risk, and capital allocation from a single software solution. KRIS public firm default service was launched in 2002. The KRIS sovereign default service, the world’s first, was launched in 2008, and the KRIS non-public firm default service was offered beginning in 2011. Kamakura added its U.S. Bank default probability service in 2014.
Kamakura has served more than 330 clients with assets ranging in size from $1.5 billion to $1.6 trillion. Its risk management products are currently used in 47 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, Ukraine, South Africa, Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam, many other countries in Asia, Europe and the Middle East.
Kamakura has world-wide alliances with Fiserv (www.fiserv.com) and SCSK Corporation (http://www.scsk.jp/index_en.html) making Kamakura products available in almost every major city around the globe.
For more information, please contact:
2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Web site: www.kamakuraco.com