New index to show banks' loan quality

[NEW YORK] A new derivatives index slated to begin trading this month may reveal how far underwriting standards for US commercial mortgage bonds slipped last year as banks rushed to arrange deals following a post-crisis lull.

Wall Street dealers are preparing the latest version of Markit Group Ltd's CMBX index, which allows investors to buy and sell contracts to hedge against losses or to speculate on borrowers' creditworthiness in the market for debt linked to everything from strip malls to skyscrapers. The gauge will be tied to 25 deals issued last year, according to an e-mail sent to traders.

The benchmark will open a window on the perceived difference between the quality of offerings sold last year, when sales doubled to US$80 billion, and those issued in 2012. All three major rating companies noted a decline in underwriting standards as 2013 progressed, including rising leverage and weaker properties, with Standard & Poor's forecasting…