Letter: Business lenders should be on the lookout for early signs of default

In your article “US Banking Regulators Warn of Risks in Leveraged Loan Market” (Report, FT.com, February 14), you are right to point out the risks associated with rising leverage ratios and the relaxation of lending standards. It is also correct to point out that the riskier loans were made by non-banks than by banks. But risk aversion alone is not a strategy. Banks must continue to lend to support their investment and transaction banking networks. As Jamie Dimon, head of JPMorgan, has warned for many years, banks are being marginalized by the rise of non-bank lenders. It has long been lamented on Wall Street that a new generation of bankers and risk managers grew up without experiencing a cycle of tightening interest rates. In other parts of the bank, higher rates will be good news, but with business lending comes the threat of a potential increase in non-performing loans.

Business loans suffer greater losses during economic downturns than consumer and home loans, due to lower collateral levels. Technology-induced disruptions and inflationary cost pressures will lead to greater differentiation among corporate borrowers in this credit cycle. Sophisticated non-bank lenders are armed with quants and technologists capable of capturing and making sense of the enormous proliferation of data.

Banks must fight back. They should look for early warning signs of failure. At Galytix, we believe that systematic processes combining artificial intelligence and human industry knowledge are essential to reconcile a bank’s internal data with the wide range of external data on borrowers, peers and supply chains. .

As Warren Buffett says, “It’s not until the tide goes out that you find out who’s swimming naked.”

Rupak Ghose
CEO,
Galytix,
London SW5, United Kingdom

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