The Elements of a Strong Credit Culture: Leadership and Organizational Structure
In the past six years since the peak of the Global Financial crisis, financial institutions have been forced to re-examine the policies and processes that govern their risk management practices.
This can be an opportunity for leaders to create or reinvigorate their enterprises’ risk culture. Omega Performance shares best practices in creating and sustaining a strong credit risk culture within your organization and how those practices can contribute to your organizations’ success.
There are four key elements to creating and sustaining a strong credit culture: leadership; organizational structure; policies, procedures and processes; and people.
Managers who openly embrace a core set of values about how credit risk is managed are important to a robust credit culture. Beyond just openly embracing those values, leadership should convey ownership of core values and beliefs, even if the ideas did not originate from him or her, to ensure guidance comes from the most senior level. Leadership should also clearly articulate the vision, values, and beliefs that guide that institution’s lending activities.
The following are some examples of core values and that can positively affect an institution’s credit culture:
- Lenders are always encouraged to collaborate with other lenders or staff members on any credit decision
- This value creates synergy, which improves the quality of risk decisions, and further ingrains behavioral expectations into daily activities.
- Balance the drivers of growth with risk management
- There is a natural tension that exists between these roles. By balancing growth with risk, by for example having customer –facing staff in teams responsible for both growth and risk management activities.
- Employ technology to improve efficiency, manage credit risk, and gain competitive advantage.
- These values enable the use of technology to streamline credit analysis process, and share credit risk information efficiently among departments, as well as also deploy technology-based learning.
- No loan is to be granted without applying human judgment.
- Leaves people in the equation of deciding credit risk.
- Balance short term objectives such as revenue growth and profitability with long-term goals of stability and market share growth.
- Creates a more uniform approach to assessing credit risk and allows lenders to accept a longer view of credit risk that aligns with management’s priority on effective loan relationship management.
The way that management organizes the various lending-related roles in the enterprise has a direct impact on its credit culture. Responsibilities should be aligned with the vision and values of the organization so that credit risk management roles have appropriate credibility and authority. While there are a few ways to structure and organize your team to effectively manage credit risk. Here are some organizational best practices that we’ve observed:
- Make your chief risk/credit officer is an integral part of the senior management team.
- Let your staff know that credit skills are fundamental to a successful career path in your organization.
- Some banks have found success in moving experienced loan officers from central underwriting and assigning them to teams or markets that are closer to the customer because of improved response time and quality of credit decisions.
- Credit risk management tends to be better when credit review is shifted to reviewing and reporting to senior management on the credit process.
- Credit training is considered a paramount activity.
- Credit training is managed by an experienced line lender.
- Align skills developed in training with needs of the line.
In our next blog, learn how policies, procedures, processes and people help you build a strong credit culture. For specific examples on how different banks are using strong leadership and a good organizational structure to improve their credit culture get the Building a Strong Credit Culture white paper.