Having personally been in the consulting business for over the last couple of decades, I have seen my share of regulatory exam reports citing a myriad of issues and MRA’s (matters requiring attention) related to asset quality and safety and soundness within a financial institution. When such conditions exist, the regulatory exam report will sometimes end with this statement: “the root cause is a lax credit culture.”
When I first read that ending conclusion, it caused me to pause to think about what that meant. After all, what exactly is a “credit culture”? It seemed broad and ambiguous. It led me down a path of discovery and conclusions in the process of examining this statement a bit closer. For instance, I have observed that while a financial institution can correct each of the individual cited issues in a regulatory exam report. But that unless the institution defines, corrects and establishes a “credit culture”, the problems will likely resurface again during the next downward economic cycle. I have observed this time and time again. I saw it in the 80’s and again during our most recent economic recession that began in late 2008.
We are now slowly emerging out of the “great recession” and with time, community financial institutions have been able to correct regulatory MRA’s, if cited, and identify and reserve for loan exposures on the books. As the economy recovers many are back to business as usual with a goal of growing the institutions and its loan portfolio. Unless your institution established or adopted a strong credit culture in the process of working through the latest economic cycle OR if you begin to slowly drift away and abandon the credit culture you may have instituted, then your financial institution could potentially suffer a repeat of the regulatory issues and asset quality issues during the next economic or sector downturn. There are bubbles forming in various areas, namely farmland real estate values that are going through the roof. There are also bubbles in home refinancings and the bond market that could pop if long term interest rates begin to move up. The point I am making is that a financial institution should continually if not annually assess its “credit culture” to mitigate its risk for the next economic downturn or bubble pop in an industry or sector of the economy.
Ok, what is this “credit culture” I keep harping about? This is how I have come to define it: An institution’s “credit culture” reflects a unique combination of attributes that define its lending behavior and lending environment. It is “how you do things around here” and begins at the top with the Board of Directors, the CEO, and the Chief Credit Officer and permeates down the lending ranks. It is your institution’s Board and executive management attitudes that determine the lending environment and behaviors deemed acceptable and are reflected in the loan policies and procedures. Loan policies and procedures that should have clear and defined limits and risk tolerances and are supported by resources allocated by the board and executive management to ensure that the policies and procedures are being followed without exception. A sound loan policy and procedures are of diminished value if they are not being followed or if there is no review or audit and system controls in place to ensure compliance. A strong credit culture implies that it takes a full commitment to lending policies, procedures, systems and controls with the full support of your institutions board and executive management team continually reinforcing in both communications and actions.
How is your credit culture?
At Suntell, we were founded 16 years ago on the desire to deliver affordable solutions to community financial institutions to support commercial lending in a more efficient environment. It takes many components to support a strong organizational credit culture. We believe Suntell’s Square 1 Credit Suite is an important component in providing the system and controls support in line with your institution’s lending policies and overall credit culture.