Management
4.11 The Corporate Banker's Role and Credit Risk Management: Critical Aspects
4.11 The Corporate Banker's Role and Credit Risk
(capital amount to be allocated, devaluations to be effected, prices to be applied according to ratings) rather than "for" the rating assignment proc- ess. To this end, the Authorities intend to keep a non-binding attitude so as not to condition the enhancement of corporate processes and the search for the competitive advantage. This is closely consistent with the general phi- losophy of the new proposal, which intends to reduce binding regulations, lead supervisory tools back to banks' internal management tools and drop the reference to the need for a level playing field, typical of the current prudential regulation.6
The choices made by the Italian and often by the other European banks tend to privilege process standardization and cost reduction in the corpo- rate area. When such choices are extended to the entire corporate segment and they are made by customization rather than commoditization oriented banks and they are not explicitly transitory, there is a problem of consis- tency with the exploitation of the information synergies between the assis- tance/advisory activities, the sales of bank products and risk valuation which all the banks described as crucial.
The choices now prevailing probably result from the just started and improvable client segmentation process, as it is unlikely that all the com- panies sharing the wide turnover fork now classifying the corporate seg- ment actually deserve the assistance of a highly skilled corporate banker.
Moreover, the current segmentation often leads to far too wide and not business specialized portfolios. Finally, the problem of reduced corporate analysis skills resulting from highly structured investigations bound to feed prevailingly mechanical rating systems is not fully perceived at the mo- ment because of the reliable risk analysis background of the officers ini- tially selected for the role of corporate bankers; the problem might grow more serious when the role is covered by corporate bankers' current assis- tants who have trained in the new operating environment.
6 It is sufficient to observe paragraphs 372 to 407 where guidelines for rating as- signment are described. Indications are loose and leave banks full independence;
they become more stringent only if mechanical systems are implemented (ibidem, paragraphs 379-383). The Basel Committee states that mechanical systems are not forbidden: "Credit scoring models and other mechanical procedures are permissi- ble as the primary or partial basis of rating assignments, and may play a role in the estimation of loss characteristics" (ibidem, paragraph 379). However the Committee is fully aware of that "Credit scoring models and other mechanical rat- ing procedures generally use only a subset of available information. Although me- chanical rating procedures may sometimes avoid some of the idiosyncratic errors made by rating systems in which human judgment plays a large role, mechanical use of limited information also is a source of rating errors." (Basel Committee on Banking Supervision 2003).
This issue is more serious in Italian banks due to the wider definition of the corporate segment and of the even more mechanical approaches to rat- ing assignment. One Italian bank, however, has definitely modified the ini- tial choice by limiting the role of essentially mechanical processes to the SME segment and, thus, taking a completely opposite direction compared with the choice it had made a few months earlier.
The need for consistent ratings can be pursued without process stan- dardization. If we look at the taxonomy of work coordinating mechanisms by Mintzberg (1983) (Table 4.13), we can see that standardization is typi- cal of simple and routine activities, such as short-term low-amount lending in a commoditization oriented transaction.
Table 4.13. Work coordinating mechanisms
Type of coordination Modes of coordination Work complexity Mutual adjustment Peers' informal communication Low Direct supervision Others' work control and re- / \
sponsibility L A Work process standardization Work contents specification
Output standardization Work expected results specifi- cation
Skills standardization Skills and capabilities homog-
enization \ / Mutual adjustment Peers' informal communication V
High Direct supervision Others' work control and re-
sponsibility
This choice turns out to be less consistent if the mission of the corporate area consists in establishing consolidated and privileged customer relation- ships, which imply medium-term company valuation and a much more skilled contribution to the identification and solution of company critical issues. From this point of view, two aspects are worthy of note: a) some banks have achieved satisfactory economic performances as to customer relationships only when the bank is considered as the reference bank; b) the traditional fragmentation of bank relationships in Italian companies has been significantly reduced (Table 4.14).
Table 4.14. Multiple bank relations in Italy Loans (euro)
a) All non-financial firms Average number of banks per borrower
% of total borrowing granted by lead bank
b) Industry
Average number of banks per borrower
% of total borrowing granted by lead bank
c) Building industry
Average number of banks per borrower
% of total borrowing granted by lead bank
d) Services
Average number of banks per borrower
% of total borrowing granted by lead bank
< 500.000
Average number of
banks not higher than 2
and first bank's average credit share
not lower than 67%
500.000- 2.500.000
2,90 61
3,45 51
2,33 72
2,70 65
2.500.000- 5.000.000
4,69 52
5,58 42
3,45 67
4,24 57
5.000.000- 25.000.000
6,61 45
7,63 36
4,88 61
5,85 51 Source: Bank of Italy (2002).
The third critical aspect regards the consistency of training processes and information tools supporting the corporate banker's activity with the mission of the corporate area, so as to align customer's expectations with customer's perceived added value of the bank's new organization struc- ture. The corporate banker's competencies and the information supporting systems in his advisory activity along with his lending authority are in fact the most immediate valuation elements customers seem to adopt when measuring the added value of the bank's new organization structure. Com- pared with the traditional approach, quality enhancement can be achieved with reasonable costs and timing only by providing the corporate banker with competencies and tools able to establish deep interaction with cus- tomers.
Paola Schwizer