Banks that give Loanscredit lenders
" Our view continues to be that credit committees should deviate from the policy of making credit decision without a particular statutory provision, and here we have taken the view that this amendment should be made in order to increase the efficiency of the board and not just to prevent possible liabilities.
The definition of the board's key features can be a challenging one. Luckily, the members of the Board of Governors of the Federal Reserve System recently presented their views on the key features of a banking council. Our agreement is with the Federal Reserve's comments on these features as presented in its proposal for a directive on the effectiveness of supervisory bodies for large banks, which is on the basis of a survey of the practice of high-performing supervisory bodies.
Many of the best practice approaches in this guide, drawing on our experience, are for banks of all sizes. According to the suggested policy, a director should: establish a clear, concerted and coherent orientation; proactively control the information and discussion flows within the directorate; account for seniors; retain an effective directorate and leadership team.
In our opinion, an assessment of the supervisory capacity of the Management in relation to the lending capacity is a necessary part of the orderly and continuous assessment of the management structures of a banking institution. Since it does this self-analysis, a panel should consider whether the practices of employee endorsement and loan approval on a loan by loan foundation support its exercise of the first four roles.
Our belief is that this is probably not the case. Taking into account individual credit approvals may affect the ability of the Committee to determine the overall direction of the credit function. We' ve seen repeated debates in the credit committee that "dip into the weeds", and in our own wisdom they have a tendency to remain there once they are.
At most of the Loan Board sessions, the speaker draws the Committee's interest to an individually tailored loan packet and discussed the advantages and disadvantages of the proposed loan. Subcommittee members usually ask specific question about the key financials, the borrowers or the proposed projects, provided there is any debate before the voting.
When determining the orientation of the bank's lending role, the lending committees should consider general developments in the markets, the concentration in the bank's lending portfolios and the identified areas of opportunity on which the banks should concentrate. Insofar as the discussion of single credit points distracts the attention of the committees from these questions, the practical experience should be re-evaluated.
Pressures for reactivity often lead to an insufficient information stream for decision-making. Second, as a key role, the Federal Reserve proposes that supervisory board members be entrusted with the management of the information flows and their sessions, as do supervisory board committee members. Often we see that loan commissions are mandated to underwrite single loans that are in the information stream in a catch-22, either at the expense of the overall reactivity of the loan facility or careful reserving, which over the course of evaluating the bank's financial position can adversely affect its overall financial results.
The majority of banks are proud of their ability to respond to credit enquiries. The core areas of brand concentration for joint banks are individual customer care and reactivity. Where the Credit Committee is obliged to give advance permission for each credit application before an authorization is given to the Mortgagor, the Credit Committee must respond as well.
Frequently, this urge to move quickly generates a stream of information that does not promote appropriate corporate Governance. Initially, banking employees can give the principals ample opportunity to examine the approval substance, and file imperfect approval collection with omitted substance message, and point ask the administrative unit to approval the debt, provided the examination message is collected.
Under the assumption that the Board is willing to give an authorization that depends on the collection of physical information and with the power that will be assigned to the executives to collect and analyze the lack of information, one wonders what the Board has actually achieved if significant portions of undertaking remain with the executives. Wouldn't it be better to entrust the collection and analysis of all details to those responsible, provided the bank's credit policies are complied with?
As an alternative, we see that there is very little free space for lending committees to review and assess long and detailled loans before making a final choice. In contrast to the lending professionals who were instrumental in collecting this information and have expertise and knowledge of both the detail of the proposed action and the overall framework of the application, the members of the lending committee often do not have this discussion backdrop and instead receive a barrage of information that they see for the first moment and are asked to make an endorsement policy in the near term.
Taking a decision with insufficient elapsed preparation and consideration times for the information on which it is based carries an enormous potential for making bad choices. Consideration of individual lending choices is detrimental to the objectivity of the Loan Committee in assessing management. Once we were discussing the possibility of modifying the loan approvals policies of a loan committee with a banking supervisor, his answer was, "If I'm going to be on the catch for these loans, the managers should be sharing that exposure with me.
" These statements were made jokingly, but they are a worrying fact for lending committees that authorize single lending approvals. As soon as the Lending Committee has approved a facility, it shares with senior managers the ethical (and possibly legal) responsibility for the facility. Consequently, it will be more challenging for the Loans Committee to make an impartial assessment of the output of the original and underlying experts in charge of the loans.
It is our belief that the Loan Committee can conduct a more efficient arm's length assessment of the bank's loan officer if it is not engaged in making loan approvals. Impartiality is the enabler of managerial assessment, and participation in the single loan writing processes involves members of the executive committee inseparably in the very service they are charged with.
The deletion of certain loan approvals will help promote the impartiality of the Loan Committee and ease supervision and accounting. The removal of the single loan approach allows the committee to concentrate on assessing exposure to risks. If the Federal Reserve is describing impartial riskmanagement, we immediately think of establishing an appropriate level of solvency, which is a normal role of the Loan Committee.
Since every banking institution is active in the risky segment, it must make a decision as to where it wants to be on the risky graph. Some people find it rewarding to take on more exposure to debt than others in order to achieve profitability and grow. Others would like to see a more cautious credit exposure stance, even if it entails revenue risks, as the banks are not prepared to lend to their rivals.
Regardless of which strategy a particular banking institution adopts, it chooses a certain degree of attrition. It is the responsibility of the Board of Directors and its subcommittees to establish a policy of tolerancing and monitoring the way this is managed. In our opinion, it does not make sense to require a credit committee to fulfil this very important task while at the same doing its utmost to subscribe to specific loans.
Quite the opposite, the decision on single loans hinders the committee from concentrating on the entire lending book and supervising the resulting exposure. It is our belief that focussing on determining an appropriate level of exposure to Credit risk rather than single loans improves the Committee's work.
Despite the advantages of turning away from the decision on single loans, many managers are reluctant to do so. Don't we have to authorize single loans? Historically, the legislation of many states mandated that director approval be given for all loans, while in other states the legislation restricted the approval of the executive committee for those loans exceeding a certain percent of the bank's equity.
North Carolina's new version of the banks codes in 2012, for example, removed a stipulation that the North Carolina State Bank's director must authorize all the bank's loans. Whilst managers should be vigilant to ensure that they certify that their state has removed wider credit licensing mandates, Swiss legislation now only demands approvals for inside loans regulated O. Why do some bodies still allow single loans when there is no legal obligation to do so?
Of the banks that continue to authorize loans, we believe that sluggishness could be the main cause for the continued use of this method - "we have always done it this way. "At other banks, managers may believe that their role is to authorise the bank's major loans or those that differ from the bank's lending policies because they represent the greatest exposure to the bank's equity.
Why should those with the least technological expertise in writing insurance and loan education make at the same and the same times the decision about the most risky loans? What if the best use of the director's resources and talent is a meeting to authorise a loan on a week or bi-weekly basis, or an efficient way to give added value to the bank's lending role?
Moreover, we have seen situations in which some supervisory directors have remained involved in certain lending approvals because the executive has different tolerance for risks than the executive, or because they have completely abandoned it. If, under these conditions, the executive committee believes that it "knows better" than its managers, it would often be better to find a new manager it relies on than to authorize single loans alone.
Of course, the Bank's supervisors want to make sure that the EIB has solid riskmanagement in place and the Credit Committee plays a pivotal role in this respect. Meanwhile, we believe supervisors are seeing that the Credit Committee's role in managing risks is best fulfilled by staying "out of the weeds" of each loan.
Although we recognise that some debate and training of auditors may be necessary as banks modify their practice, we are not familiar with any impetus from regulatory authorities in relation to this more rational approaches to loan-approval. Do I not loose the market knowledge I obtain by observing loan activities at the individual loan level?
We do not propose that managers should no longer be made attentive to the bank's loans. Instead, we propose to cancel the Credit Committee's authorisation as a condition for the bank's authorisation of a credit. In line with their task of controlling the information flows, the managers should maintain all desired information at the required levels of detail so that the Credit Committee can provide its best possible performance.
Specialized in certain loans. Often the members of the Credit Committee have specific expertise, either at sector or borrower sector levels. It may be useful in these cases for credit processors to coordinate with these principals before renewing an authorization.
It is proposed that these particular conditions be reviewed by the Board of Managing directors and, if appropriate, that the senior executives be instructed to coordinate with the appropriate director (s) before granting the loan. The provision of this contribution lags far behind the official authorisation procedure, which could divert the Loan Committee from its key function.
Whilst we believe that the main advantages of abandoning the previous approvals of certain loans are primarily related to improving the efficiency of the credit committee, these are not the only advantages. Firstly, the bank's ability to respond to borrower needs should be improved when decision-making is made by full-time staff who work in the banks on a daily basis.
Secondly, we believe that turning away from the authorisation of certain loans will reduce the risk of legal proceedings for managers, whether they are contributed by the Bank's stockholders or by the FDIC in the case of the Bank's insolvency. FDIC's role as insolvency administrator for failing banks has often involved FDIC focusing on loans to individuals that have been authorised by the Credit Committee.
For deposits, the FDIC often concentrated on loan parcel detail, which included discrepancies and parts of the loan parcel leaving empty. A number of shareholders' derivatives lawsuits also focussed on the Management Board's involvement in the approval of loans to individuals. Whilst the Loan Committee will retain many important roles, its decision-making will be more strongly oriented towards high-level policy issues.
Under the assumption of adequate information and reflection, these choices are rightly more complex to criticise, even retrospectively. Thus, for example, a deliberate policy of targeting property loans on the basis of up-to-date information on the markets is more challenging to criticise than a badly performing item. Personal loans are always worthy of critique afterwards.
The Board of Directors and its Loan Committee play an important part in the Bank's lending and riskmanagement strategies, as mentioned above, but this is best done without being burdened by the subscription and authorisation of specific loans. Instead, the establishment, evaluation and refinement of guidelines, processes and the overall lending rationale is on an on-going footing through vigorous supervision, while supervising adherence (and manager accountability) to these guidelines, processes and strategies is a far better use of directors' speaking engagements.
More strategically, we have found that a more pragmatic stance to the lending role puts the Managing Committee in a better place to pass on its unparalleled talent and perspectives to senior managers and streamline our debates within the Managing Committee to help us discuss other threats and rewards to the Group. Together, the suspension of the approval of certain loans by the Executive Committee may turn out to be a supplement by subtracting and may better place the bank and the Executive Committee to better administer the institute in the near term.