Sound Credit Considerations
Choosing Your Credit Culture
Credit Culture and Corporate Culture are very closely tied. As both evolve they must continually be well established, communicated, and enforced. In properly doing so your organization’s credit risk appetite should be made to align with your organization’s values.
Your Front Line
Relationship Managers are your front line of defense. If these folks appreciate what’s needed to appropriately mitigate risk and have the knowledge of your organization’s standards, the appropriate credit culture can be maintained more effectively from the beginning. Reward these Relationship Managers that are structuring deals and embracing your culture in-front of their peers.
Strength in Numbers
The CEO and Executive Management set the tone and must be comfortable reiterating who your lending institution is and who they are not. As with any standards, consistent communication in repetition is critical. Remember, there is no better support for a decision than providing facts. Clearly define the risk appetite and hold each other accountable to live up to that and not be situationally swayed. With it being at the top of the cycle you are potentially getting requests to change hold limits, but hold strong. Track exceptions through reports evaluating any changes since origination.
Vintage Analysis
It’s useful to understand your loan performance over the life of a loan and not just at a single juncture. In case your loans default at a higher than expected rate you should leave some buffer between the interest rate and your expected loss.
As part of proper portfolio management to analyze how loans perform with age here are some questions to consider:
Is there heavy origination in a specific segment?
Has risk changed?
Are there greater exception levels?
Are you making more exceptions?
The New Frontier
While there are a lot of shiny objects out there, focus on lending segments in which core competencies exist. If interest arises in a particular sector outside of core competency then write-up a white paper on what variables your organization would like to be able to see as a ‘sector example’ and this can be a reference to any on the front lines. If this is a new sector, can you simplify the fundamental risk? If not, then it is most likely not understood well enough to be confident in the loan. Two or more in your organization should be able to have a high level understanding of this new sector. Also, it’s a good method to have a bucket where you reevaluate and assess new sector loans 12 months after origination. Ensure they are performing the way you desire.
NOT INTENDED TO PROVIDE LEGAL, ACCOUNTING OR OTHER PROFESSIONAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH.