Management
4.5 The Corporate Banker's Involvement in Loan Underwriting
In order to analyze loan approval and review processes as well as CBs' in- volvement in such activities, it is necessary to examine three phenomena concurrent with the creation of corporate divisions/areas:
a) reallocation of tasks to different roles, in particular, those concerning credit analysis, loan proposals and approvals;
b) introduction of new operating mechanisms, such as credit limits for in- dividual customers;
c) changes in risk analysis methodologies.
The first two points will be analyzed here below; the third in the next paragraph. Note that the structure of credit renewal processes is nearly al- ways similar to that of underwriting new loans (however, the set of vari- ables conditioning the reviewing frequency is wider than in the past; in particular, the lower the borrowers' ratings the more frequent the reviews).
Table 4.5 shows the choices regarding the organizational profiles of credit selection in corporate areas/divisions in the Italian banks of our panel.
Table 4.6 shows the same information for the other European banks.
The assignment of credit underwriting and management tasks as well as the use of the operating mechanism of lending limits in these banks reveal no significant discrepancies in comparison to Italian banks.
It is evident that CBs are usually specialized in collecting credit applica- tions, consulting and negotiations but are not granted lending authority.
This is consistent both with the traditional indications by the Bank of Italy and with the recent proposals of the Basel Committee regarding the valida- tion requisites for the internal rating systems used to calculate banks' capi- tal adequacy. Paragraph 386 in the Consultative Document of April 2003, which includes a new comprehensive and updated description of the pro- posal of the New Basel Capital Accord, underlines the same requisite to distinguish the loan sale function from the credit risk function on which the bank's organization has been grounded for quite a long time.1
1 "Rating assignments and periodic rating reviews must be completed or approved by a party that does not directly stand to benefit from the extension of credit. In- dependence of the rating assignment process can be achieved through a range of practices that will be carefully reviewed by supervisors. These operational proc- esses must be documented in the bank's procedures and incorporated into bank policies. Credit policies and underwriting procedures must reinforce and foster the independence of the rating process."
Table 4.5. Credit management and loan approval in Italian banks
Bank CBs have lending authority CBs are involved in loan approval processes A Yes, it is rather limited and corre-
lated to CBs' seniority. Lending au- thority is usually located in 14 Re- gional Centers and is conditioned by mainly automatic rating sys- tems.
B Yes, it is significant if CBs are ex- ecutive cadres; in Corporate and Regional Centers there are credit officers with lending authority who report to the bank's credit function.
C Yes, but extremely limited. In Cor- porate branches there are credit of- ficers.
D No; loans are approved by credit officers after consulting Regional Centers.
E No (extremely limited if any). The Corporate branch manager is enti- tled to approve most credits (the delegation level is ad personam) and does not visit his clients.
F No. Ratings are issued on the basis of prevailingly automatic ap- proaches, based on also qualitative information provided during inves- tigations.
H Yes, rather limited. The person re- sponsible for credit approval usu- ally dedicates 15% of working time to visiting clients.
CBs make investigations and for- mulate proposals.
CBs make investigations and for- mulate proposals; assistants have mainly administrative functions.
CBs resorting to specialized assis- tants for credit valuation have a proposing role; credit officers are responsible for investigations; CBs generally work outside bank prem- ises while credit officers usually work inside.
CBs have investigation tasks and are entitled to make proposals to Area managers who trigger the credit function.
Credit analysis and approval proc- esses will become increasingly automated; they involve credit offi- cers from Corporate Division or group specialized units.
With the help of their assistants, CBs collect documentation, make a report on balance sheets and in- come statements, Credit Register and internal behavioral data and re- quest ratings.
CBs develop investigations and col- laborate to formulate credit propos- als; investigations also involve bank's credit officers (there are no credit officers from Corporate Divi- sion).
Table 4.6. Credit management and loan approval in the other European banks r> i r^r, v. -.-^. J- *u •*. CBs are involved in Bank CBs have credit lending authority . .
loan approval processes V No. The task is assigned to credit Yes, partially, as corporate credit offi-
officers from the Corporate Divi- cers are also involved sion
W No. The task is assigned to Divi- Yes, partially, as they are assisted by sion or Bank credit function some- credit officers from Corporate branch times supported by Risk manage-
ment unit
X No. The task is assigned to Bank Yes, partially, as they are assisted by credit function (Division doesn't bank credit officers from Corporate have any), which serves also as branch
credit risk management unit
Y No. The approval process is circu- Yes, as per the already described cir- lar. Credit officers express clients' cular process
ratings; CBs integrate them and propose credit amounts; area man- agers express opinion and some- times modify ratings; credit offi- cers validate final ratings and approve credit amounts
Z No. Their lending authority is quite CBs are always in charge of credit restricted proposals; for credit investigations and analysis they also rely on assis-
As a result, higher customer proximity in credit decisions is pursued by placing officers with large loan limits in corporate branches and more of- ten in (now prevailingly multi-segment) Area structures; they are often as- sisted by semi-automatic credit valuation systems.
Customer proximity is not pursued by granting CBs larger credit limits in comparison to those traditionally assigned to branch managers of non- divisionalized banks. As a rule, officers with large credit limits have a few or no contacts with clients, so that another milestone of credit management is thus confirmed.
The negative effects of this choice (lower perception of customer speci- ficities as the investigating officer is the sole observer; less information is available to the credit officer; objective and quantitative data are more em- phasized than qualitative ones) tend to be more moderate than in the past as the lending authority is delegated to officers directly interacting with
CBs in corporate or regional centers. In the case of Bank B, CBs' origins (mainly from the credit function) and the goal to achieve a thorough un- derstanding of the customer creditworthiness have induced the bank to as- sign the CB significant lending authority.
Among the major innovations envisaged over the next three years, there is the introduction of credit officers from the corporate banking divi- sion/area so that the bank credit function, which today is often a unitary department all the officers (from corporate branches/areas as well as from the retail banking units) must report to, is bound to vanish in a lot of banks.
Variables conditioning the delegation of the lending authority seem to be more numerous and more differentiated than in the past. The type of loan and the officer seniority are being sided by other variables; among them first of all the rating (usually the borrower's rather than the facil- ity's), the loan maturity, the officer's professional competencies. In some instances further variables are considered such as (the average risk of) the borrower's geographical area.
In some banks global lending limits have been introduced for the overall client's debt with the bank, in addition to lending limits for each specific loan. There are two schemes: under the traditional one, any new loan re- quires a lending authority commensurate not with its size but with the overall amount of the debt the customer will eventually have with the bank.
Under the new scheme, with no particular loan application pending, the CB presents an analysis of the customer's creditworthiness either to his/her credit officer or to a credit committee, thus acquiring the lending authority for the individual customer, to be exercised within a given period of time and for an amount that is specified case by case.
The traditional scheme restricts credit extension and thus is mainly func- tional to risk control. Normally, it is based on the use of largely automated risk valuation systems.
The new scheme is definitely oriented toward sales effectiveness, thus reducing operative procedures and enhancing customers' perception of CBs' status as they can approve new loans within the global lending limit received for that specific customer. It, however, requires the ability to as- sess borrowers' creditworthiness over a more extended time horizon; on the other hand, the fact that a loan application is not pending at the time the credit analysis is being made and discussed with the credit officer or the credit committee allows the bank to develop deeper investigations and take more meditated decisions.