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10 Components of a Robust Credit Culture

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Assessing a bank’s culture is not an easy task, but there clearly is an increased emphasis on culture that is part of the regulators' broader focus on “heightened standards.” Learn what it takes to have a strong credit culture. Read about these 10 credit culture factors to assess your institution's credit culture.

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10 Components of a Robust Credit Culture

  1. 1. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 1 JOIN. ENGAGE. LEAD. COMPONENTS OF A ROBUST CREDIT CULTURE By the RMA Credit Risk Council 10
  2. 2. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 2 JOIN. ENGAGE. LEAD. IMPORTANCE OF A STRONG CREDIT CULTURE There has been much regulatory focus over the past year on the importance of conduct and culture in financial institutions.
  3. 3. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 3 JOIN. ENGAGE. LEAD. IMPORTANCE OF A STRONG CREDIT CULTURE (CONT.) • In an op-ed that appeared in The Clearing House’s quarterly journal in late 2014, Comptroller of the Currency Thomas Curry wrote: “Business practices that have caused problems were made possible by weaknesses in the organization’s risk management and risk culture.”
  4. 4. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 4 JOIN. ENGAGE. LEAD. IMPORTANCE OF A STRONG CREDIT CULTURE (CONT.) While Curry and other regulators have admitted that assessing a bank’s culture is not an easy task, there clearly is an increased emphasis on culture that is part of the broader focus on “heightened standards.”
  5. 5. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 5 JOIN. ENGAGE. LEAD. IMPORTANCE OF A STRONG CREDIT CULTURE (CONT.) • Curry addressed this culture concern and its relation to heightened standards at a recent regulatory symposium sponsored by American Banker: “When I use the word culture it’s really the establishment of standards and the enforcement of those standards.”
  6. 6. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 6 JOIN. ENGAGE. LEAD. IMPORTANCE OF A STRONG CREDIT CULTURE (CONT.) • Lest the spotlight on culture be seen as limited only to large banks, Curry set the record straight in his op-ed article. Indeed, we have seen improper business practices and deficient risk management systems at community banks. But those smaller institutions don’t get the kind of public attention that hurts the industry’s reputation, nor do they have the same kind of outsized impact upon the economy as large banks.
  7. 7. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 7 JOIN. ENGAGE. LEAD. IMPORTANCE OF A STRONG CREDIT CULTURE (CONT.) While many of the public comments by regulators have focused more broadly on risk culture, there certainly is an implied expectation that banks will have a strong credit culture.
  8. 8. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 8 JOIN. ENGAGE. LEAD. 10 KEY COMPONENTS OF A ROBUST CREDIT CULTURE 10 key components that should be evident in every bank, regardless of size: • Credit culture starts at the top. • Everybody owns risk. • Systems and processes must be robust. • There must be room for good judgment. • There is a commitment to training and education. • Incentive systems need a risk component. • Core competencies should be the focus. • The credit message is reinforced. • Line of business growth is managed prudently. • Policy and limits are followed.
  9. 9. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 9 JOIN. ENGAGE. LEAD. 1. CREDIT CULTURE STARTS AT THE TOP The CEO and executive management set the tone for a strong credit culture. • They frequently talk about the importance of managing lending activity within the bank’s credit appetite. • They defer to the risk organization for setting credit risk standards. • This support is evident through both words and deeds.
  10. 10. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 10 JOIN. ENGAGE. LEAD. 2. EVERYBODY OWNS RISK There must be a strong reinforcement that everyone involved in the lending process owns risk management. Credit risk is not just the responsibility of those in underwriting, adjudication, and loan services. Those in client-facing roles must also take an active role in supporting the bank’s credit culture internally and externally.
  11. 11. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 11 JOIN. ENGAGE. LEAD. 3. SYSTEMS AND PROCESSES MUST BE ROBUST • A strong credit culture will be evidenced by systems and processes that support excellent execution and servicing. • Strong controls must be in place to ensure proper measurement, inspection, and accountability.
  12. 12. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 12 JOIN. ENGAGE. LEAD. 4. THERE MUST BE ROOM FOR GOOD JUDGMENT While controls must be strong, a sound credit culture leaves plenty of room for good judgment by experienced bankers. A credit process that is too driven by models and rules can actually lead to undesirable outcomes.
  13. 13. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 13 JOIN. ENGAGE. LEAD. 5. THERE IS A COMMITMENT TO TRAINING AND EDUCATION. Everyone involved in the lending process should receive regular continuing education around underwriting skills, products, laws and regulations, and bank policy.
  14. 14. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 14 JOIN. ENGAGE. LEAD. 6. INCENTIVE SYSTEMS NEED A RISK COMPONENT Credit officers should not be the only ones with a risk component in their respective incentive plans. Those in client-facing roles should have credit quality measures included to augment revenue goals.
  15. 15. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 15 JOIN. ENGAGE. LEAD. 7. FOCUS ON CORE COMPETENCIES A bank that tries to be all things to all borrowers will find itself in trouble when times get tough. • Ensure that the bank focuses on lending segments of core competency, staying away from areas that are not well understood.
  16. 16. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 16 JOIN. ENGAGE. LEAD. 8. THE CREDIT MESSAGE IS REINFORCED A solid credit culture requires persistent and consistent communication of the credit message. Those in credit and sales leadership roles must regularly emphasize the bank’s credit appetite to avoid potentially bad lending outcomes.
  17. 17. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 17 JOIN. ENGAGE. LEAD. 9. LINE OF BUSINESS GROWTH IS MANAGED PRUDENTLY A strong credit culture includes a robust portfolio management process that ensures proper diversification and granularity.
  18. 18. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 18 JOIN. ENGAGE. LEAD. 10. POLICY AND LIMITS ARE FOLLOWED • Exceptions to policy are sometimes made, but they are well documented and tracked. Exceptions • Limits are followed very closely and not compromised, even when revenue opportunities will be missed. Limits
  19. 19. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 19 JOIN. ENGAGE. LEAD. The Credit Risk Council supports professionals who are responsible for establishing, maintaining, or carrying out credit risk management policies. The council focuses on funded and off- balance sheet risk management, including capital markets activity, and other forms of credit intermediation and risk mitigation. About RMA’s Credit Risk Council
  20. 20. Enterprise Risk · Credit Risk · Market Risk · Operational Risk · Regulatory Compliance · Securities Lending 20 JOIN. ENGAGE. LEAD. SHARE THIS PRESENTATION Visit http://www.rmahq.org for information on risk management Visit our blog at http://rmablog.rmahq.org/ RMA is a member-driven professional association whose sole purpose is to advance sound risk principles in the financial services industry. RMA helps its members use sound risk principles to improve institutional performance and financial stability, and enhance the risk competency of individuals through information, education, peer sharing, and networking. Become a member today.

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