CHAP_5_Lending Policies and Procedures - managing credit risk

CHAP_5_Lending Policies and Procedures - managing credit risk

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William Chittenden edited and updated the PowerPoint slides for this edition. CREDIT POLICIES AND PROCEDURES: MANAGING CREDIT RISK Chapter 5
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Key topics 1. Types of loans banks make 1. Factors affecting the mix of loans made 1. Regulation of lending 1. Creating a written loan policy 1. Steps in the lending process 1. Loan review and loan workouts 16-2
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Types of loans made by banks Real estate loans Commercial and industrial loans Loans to individuals Financial institution loans Agriculture loans Miscellaneous loans Lease financing receivables 16-3
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Loans outstanding for U.S. Banks (2007) 16-4
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Factors determining the mix of bank loans Characteristics of market area : most lenders are chartered to serve selected markets where they are located as suburban community (residential real estate loans, automobile loans, credit for home appliances) or central city (business loans for inventory, equipment purchase, business payrolls) Lender size : legal lending limit to single borrower. Larger banks → wholesale lenders Smaller banks → retail credit 16-5
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Factors determining the mix of bank loans (cont.) Experience and expertise of management and loan policy : commercial banks tend to have experience and lending policy to make large numbers of commercial and industrial (business) loans Expected yield of each type of loan: lenders prefer to make loans bearing the highest expected returns ( highest net yields Regulations: any loans made are subject to examination and reviewed and many are restricted or even prohibited by law. 16-6
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Regulation of lending: CAMELS rating system Capital adequacy Asset quality Management quality Earnings record Liquidity position Sensitivity to market risk 16-7
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Asset quality Criticized loans : performing well but lender have minor weakness Scheduled loans : containing significant weakness or showing dangerous concentration of credit in a borrower/industry 16-8
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Asset quality Adversely classified loans : carrying risk of not paying out as planned Substandard loans : margin of protection is inadequate due to weakness in collateral of the borrower’s repayment abilities Doubtful loans : carrying a strong probability of loss Loss loans : uncollectible or unsuitable to be called as bankable assets 16-9
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Regulators’ use of market forces Because the quality of examination information decays very quickly regulators are starting to use market forces and private market discipline (e.g. borrowing costs, stock prices) to monitor bank behavior. 16-10
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1. Why is lending closely regulated by authorities? 2. How loans are classified by risk level in VN? What is the purpose of loan classification? 3.
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CHAP_5_Lending Policies and Procedures - managing credit risk

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