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Unformatted text preview: Chapter 10 Chapter The Bank Credit The Organization Organization Lending Has Been Key To Success In Banking Success
q Over $2 trillion in bank loans outstanding. q Interest & fees on the above loans contribute Interest over 2/3rds of banks’ total income. over q By 1993, total loans fell slightly to less than By half of banks’ total assets. half q Lending’s future is uncertain due changing Lending’s technology & competition--securitizing loans as part of security portfolio. + as Lending’s Purposes Lending’s
q Finance diverse groups in the economy. q Way banks allocate loanable funds strongly Way influence the community’s development. influence q Supply credit to local community to insure Supply that their communities grow. that q Take risks by loaning to private borrowers. q Minimize risks by managing lending Minimize function in a professional manner. + function Basic Faults In Lending Procedures Procedures
q Inattention to lending policies. q Overly generous loan terms & lack of clear Overly standards. standards. q Disregard of banks’ own policies. q Unsafe concentration of credit. q Poor control over loan personnel. q Loan growth beyond banks’ ability to Loan control quality + control
Continued Basic Faults In Lending Procedures (Continued) Procedures
q Poor systems for detecting loan problems. q Lack of understanding of borrowers’ cash Lack needs. needs. q Out-of-market lending. + Priorities of Credit Culture Priorities
q Emphasizing long-term, consistent Emphasizing performance of loan portfolio with highly conservative underwriting standards. (Lower risk & stable income production.) (Lower q Emphasizing aggressive loan growth & Emphasizing market share with highly flexible standards. (Higher risk & suggests acceptable loan quality with superior earnings.) + quality Credit Risk Management Credit
q Transaction risk.
– Credit organization to manage credit function. – Credit investigation & analysis systems. – Bank’s standards for underwriting loans. q Portfolio risk.
– Intrinsic risk is unique to specific borrower. – Concentration risk is amount of money tied-up Concentration in a specific industry, country, etc. + in Board of Directors Medium to Large Bank Lending Organization
Directors Loan Committee Loan Review Directors Audit Committee Audit Department Credit Department Executive Management Senior Loan Officer Officers Loan Committee Credit Analysis Collateral & Notes Consumer Division National Accounts Division Metropolitan & State Division International Division (Other Lending Division) Loan Committee Functions Loan
q Officers’ loan committee:
– – – – – – Approve major new loans. Approve major loan renewals. Review delinquent loans. Ensure compliance with loan policy. Ensure proper loan documentation. Ensure consistency in customer treatment. q Directors’ loan committee:
– Reviews officers’ loan committee actions & approves loans of substantial amounts. + Loan Policy Must Get Three Results1 Results
q Produce sound & collectible loans. q Provide profitable investment of bank funds. q Encourage extensions of credit that meet the legitimate needs of the bank’s market. + 1 Controller of the Currency’s requirements. Loan Policy Formulation
q Loan policy outline. q Loan objectives & strategies. q Trade area. q Credit standards. q Loan authorities & approvals. + Documentation Standards Documentation
q Basic loan agreement. q Credit application. q Borrower’s financial statements. q Credit reports. q Perfection of security interests. q Assignment of rents/leases where appropriate. q Assignment of insurance where appropriate. q Corporate borrowing resolution or partnership agreement where appropriate. +
Continued Documentation Standards (Continued) (Continued)
q Subordination agreement where appropriate. q Continuing guarantee where appropriate. q Financial statements on guarantor where appropriate. q Correspondence. q Copies of existing & paid-off promissory notes. + Purpose of Loan Review Function Function
Early detection of actual/potential problem loans. q An incentive for loan officers to monitor their own loans & report deterioration early. q Enforce uniform documentation. q Ensure that loan policies, laws & regulations are followed. q Inform management/board of overall condition of loan portfolio. q Assist in establishing loan loss reserves. + Conducting The Loan Review Conducting
q Financial condition & repayment ability of borrower. q Completeness of documentation. q Consistency with loan policy. q Review loan collateral & security interests. q Compliance with laws & regulations. q Apparent profitability. + Potential Problems Potential
q Disturbing trends in financial statements. q Management turnover. q Cancellation of insurance. q Security interest filed against borrower by other creditors. q Notice of a lawsuit, tax liens, or other legal action against the borrower. q Deteriorating relations with trade suppliers. + Continued Potential Problems (Continued) Potential
q Death or illness of principals. q Marital difficulties of principals. q Loss of key source of revenue. q Deterioration of labor relations. q Natural disaster. q Rapid growth. + Unethical Conduct & Conflicts of Interest of
q Exploitation of positions of trust. q Violation of confidences or use of confidential data for own benefit. q Accepting gifts of value from customers. q Investment in customer’s business. q Improper use of credit information. q Trust department has special code. + Supervisory Examination of Loan Quality Loan
q Bank’s liquidity & solvency. q Bank’s compliance with banking laws, rules, & regulations. q Quality & liquidity of the bank’s assets. q Sufficiency of internal controls. q Adequacy of capital. q Soundness of management’s policies. + Criticized Loans Criticized
q Other assets especially mentioned (OAEM). q Substandard. q Doubtful. q Loss. + ...
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This note was uploaded on 09/30/2010 for the course FIN 468 taught by Professor Bexley during the Fall '10 term at Sam Houston State University.
- Fall '10