Keys to an effective loan review function, Cooley said during the webinar, are independence, sufficient stature of the loan review officer to speak to the senior lender as a peer, and adequate funding for training as well as the hiring and retention of strong senior loan reviewers.
The proposed guidance doesn’t explicitly say the credit risk review function is good for a bank or credit union’s business. However, many community financial institutions derive a significant portion of income from lending. Furthermore, lending is a major source of risk for most banks and credit unions. It makes sense, then, that a solid credit risk review function would help protect the institution against a material impact on the business.
Credit risk review, according to the guidance, evaluates an institution’s significant loans, loan products, or groups of loans “at least annually, on renewal, or more frequently when internal or external factors indicate a potential for deteriorating credit quality or the existence of one or more other risk factors.” Credit risk review serves as a monitoring system, too, in a sense. “The credit risk review function can also provide useful continual feedback on the effectiveness of the lending process in order to identify any emerging problems,” the guidance says.
In addition to protecting against credit risk, effective loan review can defend a bank or credit union against other risks, including liquidity risk, strategic risk, compliance risk, and reputational risk. Each of these risks can affect a financial institution’s revenues and bottom line:
- Liquidity risk: The credit review process helps protect against surprises in cash flow that can have a corresponding effect on the balance sheet.
- Strategic risk: Problem loans and portfolios can alter a financial institution’s plans for allocation of resources and new products.
- Compliance and reputational risk: An independent credit review function provides oversight that heads off exposure to corrective actions, fines, civil money penalties, and diminished reputation.
Certainly a strong credit risk review function is important for making examiners happy. However, creating an independent, strong, and adequately funded loan review function can also be good for your business. Learn more from the webinar, “Best Practices for Credit Analysts.”