Why Granularity Matters

Granularity.  Specificity.  High-resolution.  Drill down.  Different words, all meaning the same thing: give me more detail; show me the texture; tell me the story within. That is what the WAIN Street Business Credit Health Index (BCH Index) does for managers of mid-market and small business credit portfolios.  It gives them an aggregate view of national credit health trends with the ability to zoom into details by industry, geography, and business size.  It lets them see how various segments of their portfolio compare to a relevant benchmark.  It provides fine-grained, actionable information that adds value across functions and processes.

We were excited when Vikram Pandit inadvertently became a WAIN Street spokesman by affirming the need for benchmarking.  Now with the Federal Reserve explaining the need for granularity we are again excited.

As reported by a recent Bloomberg article, the Federal Reserve’s Daniel Tarullo has been critical of bank risk models for their most recent stress tests. The issue? The data isn’t granular enough. “Flaws included marking down all housing prices at the same rate, rather than matching them to specific regions…”  So why is this a concern?  Well, not understanding how your data breaks out by various segments creates blind spots. “A 20 percent decline in national house prices would mean that prices would decline substantially more in some markets and less in others.”

We understand The Fed is talking specifically about residential real estate; however, the point holds true for all asset classes. Understanding the granular breakdown of any portfolio can be beneficial; and is even more important for portfolios exposed to the varied and diverse mid-sized and small businesses.  Businesses to which banks have exposure in excess of $700 billion.  Businesses whose ability to meet financial obligations is more dependent on geography, industry, and size than larger corporations.

If The Fed is coming down on the big banks for ignoring the demographic differences between residential mortgages during stress testing, you’d have to believe that they’d appreciate the type of granular analysis WAIN Street enables for credit portfolios.