For any financial organization, building a robust credit risk management policy and procedures is paramount. Why?
The design and implementation of written policies and procedures related to identifying, measuring, monitoring, and controlling credit risk is a cornerstone of safe and sound banking. Credit risk policies establish the framework for lending and guide the credit-granting activities of the bank, and should address topics such as target markets, portfolio mix, price and non-price terms, limits, approval authorities, exception processing/reporting, responsibilities, duties and obligations of all parties in the management and control of credit risk, etc. Credit risk policies should be clearly defined, consistent with relevant regulatory requirements.
Credit risk policies and procedures that are properly developed and implemented enable the bank to: (i) maintain sound credit-granting standards; (ii) monitor and control credit risk; (iii) properly evaluate new products and investments; and (iv) identify and administer problem credits. For this reason, building a risk management framework should be top of mind for every financial organization.
What actionable tips can your organization follow to build a robust credit risk management policy and procedures?
4 Credit Risk Management Policy and Procedures Tips for Banks
Most seasoned risk managers know that risk management is an ongoing process, not a static exercise performed once or twice per year. In this scenario, ongoing risk management processes work to identify risks that are subject to volatility.
An enterprise risk management framework works to help your financial organization successfully evaluate associated risks critical to the vitality of your company. In this pursuit, it's important to analyze incoming data related to credit risk. To ensure that processes and procedures are developed to identify the sources of credit risk, assess their magnitude, and mitigate those risks as appropriate, a bank's lending, investment, reinsurance, and/or secondary market activities policy and/or appropriate governance documents should include the following:
1. Approved Products and Instruments
Credit risk governance documents should clearly specify approved loan products, investment instruments, types of asset securitizations, loan purchases, sales, or participations. Governing documents should also require that proposed new loan products or instruments be reviewed and added to the approved lists prior to use.
RELATED READING: 4 Components of an Enterprise Risk Management Framework for Banks
2. Individual Authorities to Lend, Invest, or Conduct Secondary Market Activities
Credit risk policy and other governance documents should clearly specify the approval processes for large dollar transactions and should include limits on the size of transactions that can be approved by single individuals and those requiring multiple approvers.
3. Origination/Acquisition Standards for Loans and Investments
Credit risk management policies, procedures and other governance documents should include underwriting criteria that specify the types of factors to be considered in loan approval and investment purchase criteria that specify the types of factors to be considered in acquiring credit-sensitive investments. They should also indicate how underwriting, collateral appraisal and securities/investment selection operations are configured to maintain the integrity of the information needed to apply the criteria.
4. Partner With Outsourced Risk Management Team
Development of an effective credit risk management program is critical to your financial institution's stability and needs to be a top priority. It’s perfectly acceptable for a financial institution to rely on a third party to alleviate the internal operational burden. Benefits of outsourcing risk management policy and procedures include:
- Save time and resources by allowing your team to focus on strategic decisions
- Fill subject matter expert gaps
- Having a reputable firm means you can plan to meet regulatory expectations
- Give your organization a competitive edge
- Gain peace of mind
Getting Started With Compliance Core
Compliance Core manages all aspects of enterprise compliance and risk management, giving your organization the flexibility to focus on core business operations. We are here to answer your strategic credit risk management questions and concerns.
How mature is your risk management and compliance program? We've created a simple self-assessment to help you track performance against industry standards. Use this data to identify gaps in your risk management policy and procedures.
After the quiz, you'll have an opportunity to connect with us directly to discuss key next steps toward achieving major risk management policy and procedures goals.