Analyzing the business of banking - new trens and old issues

Implications: The attached article highlights the fact that banks are tailoring more products to an aging population.  Good businesses and industries evolve to meet the changing needs of the market place.  However new products also pose risks.  Financial analysts need to focus on the risk, as well as the returns, such banks embrace.

Analysis: The banking industry is creating and embracing more products designed for an aging population.  In the past, such products have been primarily deposit oriented.  However more and more institutions are offering loan products such as reverse mortgages.

All loan products, such as reverse mortgages, create two types of risk.  The first is default risk.  It appears the banking industry is prudently handing such risks.  For reverse mortgages, there is government insurance through the Department of Housing and Urban Development.  In addition, banks usually use relatively strong underwriting standards, such as low loan to value measures.  Banks appear to managing default risk well.

What is less obvious is the second form or risk, or asset-liability risk.  The question is "How are such loans being funded?"  How does the duration of the loan product compare to the duration of the funding source?  Given reverse mortgages are not paid off until the property is sold (e.g., death of borrower), are banks adequately measuring and managing the inherent risk of matching the source and use of funds?

All too often financial analysts measure the success or failure of new products and strategies by the impact on net income.  This static approach can neglect the risk inherent in such products/strategies.  Financial analysts, specializing in banks, must challenge bank management to disclose and explain how they are managing such risks.  Return must compensate for "all" risks.