In recent weeks I’ve found myself involved in several discussions about credit training. It always surprises me how our views as bankers on what we mean by credit training can be so different.
For all the talk about disruption and new products, credit remains the hub of banking as we know it. For banks, that process remains under very intense regulatory scrutiny, and, even were that not a factor, at the end of the day how most banks perform hinges on how well their loans perform.
A key element when “talking credit” is: Are we continuing to get it right? Take what you are about to read as a guide to self-examination.
“Credit training classic”
My own background is from a traditional large bank loan officer development program. The training consisted of a combination of some formal instruction with the majority of our time devoted to on-the-job learning. I worked in a large credit department that administered the “back office,” ranging from care and custody of the files to spreading of financial statements and formal analysis on credits above a certain size.
Over an 18-to-24-month period, each participant learned to do everything in that department. We were supervised by a permanent cadre of credit professionals—a crew of genuine taskmasters. They made sure that we were proficient in our craft in the context of the bank’s regular workflow. We received regular exposure to the working lenders and occasionally met with customers, albeit in a support role, with the account officers.
Back in those days, there were no short cuts. Financial statements were manually spread. Our analysis, as supervised as it was, consisted of in-depth original work on the borrower’s financial capacity. There were no credit decisionmaking models relying on the ubiquitous credit scoring techniques that have seemed to take over the credit side of banks in the last few years.
I don’t mean to sound like a gray-beard reactionary. And I’m not opposed to labor-saving programs and routines. Times and ways of doing things evolve. Many of the jobs done in credit departments, then and now, are routine and labor intensive. If we can speed up the process of decision-making and pare the salary cost component of what it takes to make a sound credit decision, then as good managers and stewards we must do that.
But we must balance this against the need for sound credit performance.
Has evolution gone too far?
What I’m reacting to is a generally prevalent attitude that we have improved the overall process. I submit that the contrary is likely true.
I fear that we have lost something important and that’s the nuts and bolts sense of the credit analyst on how things “work.” No longer do we struggle over how to meaningfully present in our spreads the material assets and liabilities of the borrower. We don’t manually reconcile surplus.
We almost seem unwilling to get our hands dirty.
Maybe this streamlining of the work process is necessary today for cost reasons. But I’m frankly surprised at the pride many credit administrators take in the way certain elements of credit underwriting have been modified.
Banks still do much of the analysis more or less in the old-fashioned way but with less intimacy with the details and subtleties of the financial statements. We know less about a borrower’s financial capacity to repay debt and therefore both the bank in the overall credit risk sense and the borrower in the financial management sense have lost something that the process used to deliver.
Are we “getting behind the numbers”?
When credit-scoring models came into widespread use in recent years, I recall that they were considered by many to be useful as a safe harbor in credit analysis. If the applicant “scores” then we can proceed with the credit. If the score fails the hurdle, then we take a pass with little or no exposure to allegations of lending discrimination. Unfortunately, “disparate impact” logic—the debate concerning which has again reached the Supreme Court—has largely undermined this important benefit.
Scoring models largely do what we expect of them: successfully predict credit outcomes within determined confidence intervals. That’s substantial and important in this age of risk management.
But what I fear we are doing is training a large number of lending officers who lack the tools, by experience and formal training, to really get behind the numbers.
Is there enough rigor in the process?
I won’t say that these people are “credit illiterate.” But they are certainly by their training experience less qualified than their predecessors in the intricacies of credit analysis.
Even in many community and smaller regional banks, there is by anecdotal evidence considerable job turnover among the lenders nowadays. Lenders move for a variety of reasons such as career enhancement and the opportunity to work in larger environments and on broader lending product lines.
One potential weakness of our community bank credit approval systems is the lack of formality present in many lending environments. I’ve personally seen in my various due diligence team experiences just how different the various back offices of banks appear to the outside inspector. It’s a marvel that the results are as consistent as many of them seem to be.
If I hire a lender from another bank, unless he or she is in the same market, I likely know very little about the person’s skills and proficiency. Many lending environments are characterized by relatively modest levels of management by seniors of the actions of their subordinates. How long does it take to form definitive judgments on the depth and breadth of a new-to-the-bank lender?
“Credit culture” defies yardsticks and scales, but it is quite real. A strong credit culture means a high level of commonality and consistency in the quality of the work output and in the traditional metrics of sound credit over a considerable period of time.
I fear that we simply don’t have the same continuity of such experiences today.
We can’t afford to not get this right
Classroom education at universities or community colleges on credit matters is a far cry from the real-world experience and dynamic of lending money to business borrowers.
And training programs that don’t train thoroughly in the mechanics of statement spreading and credit analysis are simply providing inadequate preparation for the reality that we have lived through in the last few years.
I hope we as a community banking industry understand what the foundation of a strong credit culture must comprise. If not, we’re destined to live through another period that will be personally more devastating than anything we’ve seen in our working lifetimes. And next time around, there will likely be a dramatically shrinking circle of musical chairs.
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