BANKING 101—CREDIT ANALYSIS.

BANKING 101—CREDIT ANALYSIS. One of the basic functions of a commercial bank has always been assessment of credit risks. Michael Lewis portrays the German banks as being too trusting in their credit analyses: “At bottom…the Germans were blind to the possibility that the Americans were playing the game by something other than the official rules.” But the largest American banks did the same thing (Lewis calls them “similarly stupid bets”). Their evaluations of the toxic securities were obviously inadequate. Their assessment of the credit risks of the counterparties to their transactions was just as inadequate. The events after the Lehman default showed that they did not discover, until just before the end, the risk of default by Lehman. It became apparent that they had not understood the risk of providing credit to Lehman’s counterparties (in fact, nobody had an accurate idea of who those counterparties were and the extent of their exposure to a failure of a major bank). What the largest banks did was the equivalent of no assessment of credit risk at all.