Podcast
Questions and Answers
What is the primary role of Loan Committees?
What is the primary role of Loan Committees?
- To review major loan proposals and loan delinquencies (correct)
- To approve all loan applications regardless of size
- To manage the day-to-day operations of the bank
- To provide financial advice to customers
What is the benefit of a bank utilizing a system with smaller loan limits and relying heavily on loan committees for approval?
What is the benefit of a bank utilizing a system with smaller loan limits and relying heavily on loan committees for approval?
- Reduced administrative burden
- Greater control and safety (correct)
- Greater flexibility and efficiency
- Increased customer satisfaction
Which of the following is NOT a duty of a Loan Committee?
Which of the following is NOT a duty of a Loan Committee?
- Reviewing loan renewals
- Determining the interest rate for all loans (correct)
- Reviewing new loan applications
- Determining the cause of delinquent loans
What is the main purpose of a bank’s credit policy?
What is the main purpose of a bank’s credit policy?
According to the Comptroller of the Currency (USA), a written loan policy should achieve which of the following outcomes?
According to the Comptroller of the Currency (USA), a written loan policy should achieve which of the following outcomes?
What is the initial cash deposit received by Bank A?
What is the initial cash deposit received by Bank A?
What role does a credit policy play in ensuring the quality of a bank's loan portfolio?
What role does a credit policy play in ensuring the quality of a bank's loan portfolio?
Why is it important for a credit policy to be in written form?
Why is it important for a credit policy to be in written form?
What is the ratio of cash to total deposits that banks are aiming to maintain?
What is the ratio of cash to total deposits that banks are aiming to maintain?
What is the amount of the loan granted by Bank A to a customer?
What is the amount of the loan granted by Bank A to a customer?
What is the ultimate decision-making body regarding the approval of major loan proposals?
What is the ultimate decision-making body regarding the approval of major loan proposals?
After the loan is granted, what is the amount of cash remaining in Bank A's balance sheet?
After the loan is granted, what is the amount of cash remaining in Bank A's balance sheet?
After the customer withdraws the loan amount, how does it affect Bank A's liabilities?
After the customer withdraws the loan amount, how does it affect Bank A's liabilities?
What is the type of asset that Bank A exchanges when granting a loan?
What is the type of asset that Bank A exchanges when granting a loan?
Why is it assumed that the customer withdrawing the loan will spend it?
Why is it assumed that the customer withdrawing the loan will spend it?
What happens when the recipient of the cheque deposits it into their account at Bank B?
What happens when the recipient of the cheque deposits it into their account at Bank B?
What are the three general parts of a credit policy outline?
What are the three general parts of a credit policy outline?
What is the main purpose of a written credit policy, according to Michael Dennis?
What is the main purpose of a written credit policy, according to Michael Dennis?
Which of the following is NOT a type of loan mentioned in the text?
Which of the following is NOT a type of loan mentioned in the text?
What is the role of a credit policy in lending decisions?
What is the role of a credit policy in lending decisions?
Which of the following is NOT a strategy for mitigating risks associated with credit/lending?
Which of the following is NOT a strategy for mitigating risks associated with credit/lending?
What is the main objective of a credit department within a bank?
What is the main objective of a credit department within a bank?
Why is it important to have a credit policy and procedures manual updated regularly?
Why is it important to have a credit policy and procedures manual updated regularly?
Which of the following areas is NOT directly related to the management of a loan portfolio?
Which of the following areas is NOT directly related to the management of a loan portfolio?
What is a key element that lenders consider when assessing a potential borrower's character?
What is a key element that lenders consider when assessing a potential borrower's character?
Why is the margin of profit important to a lender?
Why is the margin of profit important to a lender?
Which of the following is NOT considered a principle of good lending?
Which of the following is NOT considered a principle of good lending?
What is a primary purpose of a personal interview when assessing a borrower's character?
What is a primary purpose of a personal interview when assessing a borrower's character?
For business customers, what is crucial in addition to the character of the borrower?
For business customers, what is crucial in addition to the character of the borrower?
What is a potential red flag when evaluating a business borrower's ability to repay?
What is a potential red flag when evaluating a business borrower's ability to repay?
Why might a lender require security for a loan?
Why might a lender require security for a loan?
Which of the following is NOT a common component of a lender's margin of profit?
Which of the following is NOT a common component of a lender's margin of profit?
What is the primary source of risk in a lending context?
What is the primary source of risk in a lending context?
Which of the following is NOT a factor that contributes to inherent risk level?
Which of the following is NOT a factor that contributes to inherent risk level?
What does a secured credit arrangement specify?
What does a secured credit arrangement specify?
Which of the following describes the concept of 'credit risk'?
Which of the following describes the concept of 'credit risk'?
What is the significance of a bank's strategic business objectives in relation to inherent risk?
What is the significance of a bank's strategic business objectives in relation to inherent risk?
How does the level of inherent risk impact the risk strategies and control measures employed by a bank?
How does the level of inherent risk impact the risk strategies and control measures employed by a bank?
What is the key feature that distinguishes unsecured credit from secured credit?
What is the key feature that distinguishes unsecured credit from secured credit?
Which of the following best describes the concept of 'default risk'?
Which of the following best describes the concept of 'default risk'?
What consideration should a banker prioritize when evaluating a borrower's overdraft facility request?
What consideration should a banker prioritize when evaluating a borrower's overdraft facility request?
If a borrower requests a smaller loan amount than what is seemingly necessary, what action should a lender take?
If a borrower requests a smaller loan amount than what is seemingly necessary, what action should a lender take?
What type of financial commitment is considered crucial for borrowers, particularly in business scenarios?
What type of financial commitment is considered crucial for borrowers, particularly in business scenarios?
When assessing a business borrower's request for a loan, what financial document(s) should a banker analyze to determine if the requested amount is appropriate?
When assessing a business borrower's request for a loan, what financial document(s) should a banker analyze to determine if the requested amount is appropriate?
Why should a banker be wary of providing risk capital to a borrower?
Why should a banker be wary of providing risk capital to a borrower?
Suppose a banker is evaluating a loan request from a small business owner. What should the banker consider if the owner later requests additional funds, suggesting an initial underestimation of costs?
Suppose a banker is evaluating a loan request from a small business owner. What should the banker consider if the owner later requests additional funds, suggesting an initial underestimation of costs?
In what scenario might a lender be required to provide additional funding to a borrower after the initial loan?
In what scenario might a lender be required to provide additional funding to a borrower after the initial loan?
How does a borrower's significant financial stake in a venture typically influence their commitment?
How does a borrower's significant financial stake in a venture typically influence their commitment?
Flashcards
Inherent Risk
Inherent Risk
The level of risk that may change due to economic factors or other non-controllable influences.
Subprime Mortgage Loans
Subprime Mortgage Loans
Loans offered to borrowers with lower credit ratings, typically at higher interest rates.
Credit
Credit
A deferred payment arrangement allowing benefit now and payment later.
Secured Credit
Secured Credit
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Unsecured Credit
Unsecured Credit
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Collateral
Collateral
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Credit Risk
Credit Risk
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Credit Policy
Credit Policy
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Multiple Expansion of Deposits
Multiple Expansion of Deposits
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Reserve Ratio
Reserve Ratio
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Bank A Balance Sheet
Bank A Balance Sheet
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Assets vs Liabilities
Assets vs Liabilities
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Loan Creation
Loan Creation
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Withdrawal Impact
Withdrawal Impact
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Transfer to Bank B
Transfer to Bank B
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Bank Liabilities after Loan
Bank Liabilities after Loan
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Loan Committees
Loan Committees
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Major Loan Review
Major Loan Review
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Delinquent Loans
Delinquent Loans
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Loan Approval Process
Loan Approval Process
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Board of Directors' Role
Board of Directors' Role
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Written Loan Policy
Written Loan Policy
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Loan Document Compliance
Loan Document Compliance
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Collateral Perfection
Collateral Perfection
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Loan Portfolio
Loan Portfolio
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Types of Loans
Types of Loans
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Risk Management
Risk Management
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Technical Procedures
Technical Procedures
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Written Credit Manual
Written Credit Manual
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Customer Goodwill
Customer Goodwill
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Purpose of Loan
Purpose of Loan
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Repayment Time Period
Repayment Time Period
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Lender Assessment Factors
Lender Assessment Factors
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Character of Borrower
Character of Borrower
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Ability to Repay
Ability to Repay
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Margin of Profit
Margin of Profit
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Security for Loan
Security for Loan
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Skill Assessment for Businesses
Skill Assessment for Businesses
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Borrowing Requirements
Borrowing Requirements
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Overdraft Facility
Overdraft Facility
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Lender's Decision Making
Lender's Decision Making
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Funding Sources
Funding Sources
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Borrower's Contribution
Borrower's Contribution
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Liquidity After Loan
Liquidity After Loan
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Cash Flow Projections
Cash Flow Projections
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Balance Sheet Analysis
Balance Sheet Analysis
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Study Notes
Unit 1: Credit and its Inherent Risks
- Banking's core business is lending/credit.
- Over $1 trillion in outstanding bank loans globally.
- Interest and fees on loans comprise two-thirds of banks' total operating income.
- The course explores the credit function in financial institutions, particularly banks.
- Two sessions cover credit risks and sound lending practices.
Session 1.1: Credit and Its Inherent Risks
- Lending is a critical function for financial institutions.
- Bank lending is crucial, and its quality can make or break a financial institution.
- Credit is important for the community, clients' relationships, and cross-selling services.
- Lending programs help banks generate revenue via interest, fees, and investment income.
- There are inherent risks in lending, regardless of management control.
- Key risks include economic changes, check fraud, bank robberies, mortgage defaults, and business choices (e.g., subprime mortgages).
- A high level of risk does not necessarily equate to negative outcomes, nor is low risk necessarily positive.
- The bank's strategic objectives influence acceptable risk levels.
Key Terms
- Credit: A deferred payment arrangement where a benefit is received now and paid for later.
- Secured Credit: A credit agreement with an alternative if the borrower defaults.
- Unsecured Credit: A credit agreement without a specified alternative in the event of default.
- Collateral: An alternative asset that can be seized in case of default.
- Risk: The likelihood of loss due to a borrower's inability to repay a loan.
- Credit Risk: The probability that a borrower will fail to meet agreed-upon debt obligations (also known as default risk).
- Credit Policy: Clearly defined guidelines for providing credit: terms, customer qualification criteria, collections procedures, and handling delinquencies.
- Default Risk: A borrower's failure to meet their debt obligations.
Session 1.2: Cannons of Lending and the Basic Principles of Sound Lending Practice
- Profitable lending balances income with the risk of non-repayment.
- Essential for banks to establish requirements for growing their credit portfolio.
- Lending involves several key principles:
- Character of the borrower
- Ability to repay the loan
- Profit margin for the lender
- Reason for seeking the loan
- Amount of the loan request
- Terms of repayment
- Secondary source if loan repayment fails
- Character of borrower is assessed with past records and personal interviews.
- Determining the appropriate loan amount involves considering borrower needs and their ability to repay.
- Important to consider the borrower's purpose for the loan, whether it's for working capital, a new business, or other purposes.
- Establishing security for the loan is vital to mitigate default risk and ensure recovery if repayments fail,
- Loans related to speculations might be rejected.
- The 5 C’s of credit (character, capacity, capital, collateral, conditions) are important factors to consider for a successful lending proposition.
- A comprehensive process for loan assessment includes introduction, application review, specifics of the request, guiding principles, and securing repayment.
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