Peeking over the fence: How other banks run Loan Review
Originally published on cbinsight.com
Observant neighbors will attest: it can be helpful to know what your neighbors are doing, to both inform what you are doing and to see how they compare. Essentially, nosey neighbors are benchmarking, and while it may not always be well received about the other party, we have good news for bankers.
Peer banks are letting you peek over the fence.
Whereas call reports and financial data for peer banks and credit unions are readily available, other information like internal reporting structures and major challenges is not. Sageworks and Synergy Bank Consulting recently conducted a survey of community banks and credit unions to ascertain how banking organizations are set up and run.
One area of focus within the survey was Loan Review, including how the function is organized, how responsibilities are delegated and what is typically covered.
An early question found what percentage of banks in different asset classes uses in-house or outsourced Loan Review functions. When performing loan review, banks and credit unions can either perform the analysis internally, outsource it to a third party or combine the practices in a hybrid model. There is no, single, correct way to organize this area, though each methodology can come with risks and rewards.
The survey showed that most banks primarily keep Loan Review in-house but may use outside firms for consultancy. Responses were also tagged according to federal regulator, and it is interesting to see that OCC regulated institutions are more likely to perform Loan Review using primarily internal resources (56 percent of OCC banks) while Federal Reserve regulated banks more often primarily outsource the function (50 percent of Federal Reserve banks.
The survey also sought out the reporting structure for Loan Review – who in the institution reviews final assessments.
For Loan Review to be successful and muster approval at federal exams, it is critical that the reporting structure is independent –someone outside of loan production so they can objectively assess portfolio credit quality. In some cases, too much independence can also lead to unfamiliarity with credit processes and procedures and difficulty in communicating results back to lending. So Loan Review requires a balance of both objectives, independence and familiarity, and an understanding of the players involved.
The survey also expands upon frequency of Loan Review reporting, to both the Board and the senior management in the bank. There was some variance in the responses, but the majority of responding banks indicated it was a monthly occurrence.
It was also interesting to note what type of content is typically included in Loan Review reports. Credit and portfolio quality trends, along with Loan Review activity, were commonly included elements, with about 70 percent of respondents indicating they were included. Economic conditions – for example, regional unemployment figures or industry data – were included much less often, about 38 percent of the time. However, given that these external economic figures can serve as useful documentation, banks might consider how and when to incorporate it in for future reviews.
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