Loans make up the majority of a bank’s assets. Failure to adequately manage credit risk has led to more bank failures than any other risk factor in a bank. Consequently, having a comprehensive, thorough, effective, and a high quality independent loan review is one of your primary tools in ensuring this risk remains in check.
Here are some attributes of a good independent loan review:
- How much of the portfolio that is reviewed, and which loans are analyzed, should be risk-based.
- How loan risk ratings are assigned should be based on a proven methodology, be consistent among the reviewers, and be transparent to the bank.
- The loan review firm should be able to quantify (mathematically) the risk in your portfolio. This is necessary so you can determine if credit risk is high, moderate, or low and if it’s stable, increasing, or decreasing.
- The review should be able to pinpoint which segments of your portfolio (by loan type, industry, origination date, etc.) are showing heightened risk level so the risk can be reduced.
- Final loan review reports should be easy to understand, especially by the Board of Directors, so they can fulfill their responsibility of setting good risk tolerance limits for bank Management.
Is your loan review firm meeting the above requirements? If not,
us. We have been doing loan review for over 30 years and our reviews meet all of the above criteria.
Bo Singh, President
T. Gschwender & Associates, Inc.
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