Risk Advisory Services

Overview

For over thirty years, the regulators have advocated, or required, an independent validation of credit risk. There is a good business reason for this function if well-managed. A significant portion of your budget is spent on this function and in today’s heavy-cost, heavily-regulated banking world, you need to get optimum value for every dollar spent.

Our Credit Risk Advisory Services are offered in a four-pronged approach:

  • Evaluation of your existing Credit Risk Review process;
  • Design and implementation of a CRR process tailored to your credit environment;
  • Performing the CRR function ongoing, using a risk-based approach; and,
  • Surgical evaluation of credit files and risk in a specific industry, collateral type or other parameter, as you desire.

We can perform any one, or all, of these services for you. Our objective is to optimize the resources you spend on this function. It should provide management and the Board with meaningful feedback on the performance of your loan portfolio, the risk embedded within it, and staff expertise and performance in administering the portfolio. Following is a more detailed description of each of the four components.

Part 1 | Evaluation of your Credit Risk Review Process

If you are getting the same basic outsourced credit review project scope and redundant report content year after year, have you considered whether your dollars are still being well spent? Are the results meaningful to your Board?

Targeted coverage ratios that are too high may actually sabotage your credit risk program and your capital investment. Vendors may be plowing through files just to hit coverage targets and not spend enough time to truly understand the underlying credit risk.

Our Credit Risk Review Process helps you to evaluate the efficacy of your function to ensure:

  • The Credit Risk Review mission is clearly articulated and establishes objectives as defined by the Board.
  • The Credit Risk Review function is driven by a sound risk assessment tailored to your institution.
  • Credit risk is evaluated, as defined by policy and scope, while value is added via insight and observations of individual lending credit relationships, sectors and industries, portfolios, collateral, purpose, and economic trends and threats.
  • Board reports include findings prioritized based on risk; root causes of systemic deficiencies; practical solutions to address root causes; management responses and commitments; tracking of corrective actions; validation of sustained corrective actions and, best practice considerations.

Upon commencement, we will familiarize ourselves with your risk profile by reviewing your organizational chart, previous examination reports, recent credit risk review reports from outside vendors, and Board reports. We will meet with your credit and risk leadership to discuss the risk assessment process and test the knowledge, skills and abilities of the staff responsible for the risk assessment.

It is critical that we gain perspective of the work performed to date. To that end, we will test complex credits that were evaluated by your vendor, comparing our results to vendor findings and thoroughness, relevance, expertise, red flag identification, quality of analysis and synthesis of findings. All work papers and conclusions will be assessed against formal report content.

We will validate the vendor’s conclusions on:

  • Asset Quality as reported by executive management.
  • Compliance of credit processes with established policies and good banking practice.
  • The effectiveness of ongoing supervision of credits by loan officers.
  • Portfolio performance.
  • Management and Board supervision of the credit environment.
  • Adequacy and accuracy of management information systems.

Based on the preceding steps, we will assess the strategic and tactical value of the credit risk review function, taking into consideration product and process developments; levels of expertise and input for adding value to front-end processes; and addressing the structure and scope of the credit risk review process relative to your risk profile and strategic direction.

Once we have concluded our assessment, rest assured that you will have options for a stronger, more meaningful, value-added credit risk review process in place that is guided by sound credit risk management practices.

Part II | Design and implementation of a CRR process tailored to your credit environment

The CRR scope and frequency will be driven by a comprehensive risk assessment that considers, among other factors:

  • Prior CRR findings.
  • Level and trends of the credit risk profile (e.g. by product, line of business or sector).
  • Outlook ratings by sector and industry trends.
  • New products and/or markets.
  • Trends or changes in quality indicators, such as past due levels, losses and criticized credits.
  • Growth, both realized and planned.
  • Changes in policies or underwriting standards.
  • Management and staff changes.
  • Management and Board concerns.

We do not advocate for a specific target ratio. Our model targets a sufficient number of credit relationships to validate your policy, staff, underwriting, ongoing administration and reporting. We also do not transcribe data from individual files, such as financial statements and collateral information onto our software which is time consuming and costly. We use file data for our analysis, and our work papers are concise and conclusion-oriented to provide you meaningful commentary on our observations. Once our transactional scope has been defined, we will review selected credits to assess:

  • The depth of credit and financial statement analyses commensurate with the size and complexity of the credit request and overall borrowing relationship.
  • Accuracy of internally assigned risk ratings.
  • Adequacy of, and adherence to, established policies, procedures and underwriting guidelines as well as variances to Board limits.
  • Loan approval processes, including policy exceptions and compliance with approval conditions.
  • Adequacy of loan documentation, collateral valuation methods, collateral perfection and secondary controls.
  • Adherence to lending-related laws and regulations.
  • Loan Officer accountability and ongoing account management.
  • Identification, collection and management of problem loans, including timeliness and effectiveness of loss mitigation measures.
  • Sufficiency and depth of management and Board reporting, including policy exceptions, delinquency and non-performing asset trends, loan growth, concentrations and classified assets.
  • Evaluation of the methodology used to determine the adequacy of the Allowance for Loan and Lease Losses.

Through this process, we will validate:

  • Asset Quality as reported by executive management.
  • Compliance of credit processes with established policies and good banking practice.
  • The effectiveness of ongoing supervision of credits by loan officers.
  • Portfolio performance.
  • Management and Board supervision of the credit environment.
  • Adequacy and accuracy of management information systems.

We will opine on the structure and the meaningfulness of formal reports, to determine whether the reports capture:

  • Systemic conclusions that are prioritized by risk;
  • The appropriateness of internally assigned ratings;
  • The root cause of deficiencies;
  • Recommended corrective actions;
  • The validation of sustained corrective action for previously identified deficiencies;
  • Best practice considerations; and,
  • Audit Committee and/or Board attention to systemic risks and findings.
Part III | Performing the CRR Function

We are prepared to assist you in designing a tailor-made process for you, to be performed by your chosen staff or vendor. We can also perform this function ongoing for you, using the risk-based process described above.

Part IV | A La Carte Services

We also perform specific services related to your credit functions, where you may desire independent evaluation of a specific component, such as:

  • Policy evaluation.
  • Credit file transaction testing for a specific group of loans.
  • Collateral/RE appraisal management evaluation.
  • Staff expertise for a given function.
  • Retail credit (e.g. indirect auto, home equity, home mortgage, unsecured revolving or installment loans).
  • Credit Risk Review: Meaningful or Meaningless?

  • Credit Services

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