Reconsideration of the bank credit assessments theoretical and practical issues
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RECONSIDERATION OF THE BANK CREDIT ASSESSMENTS: THEORETICAL AND PRACTICAL ISSUES. Alexander Rad, Olof Wahlberg, Peter Öhman and Einar Häckner Paper presented at the ERES 2009 Conference, Stockholm June 24-27 2009. A Research program. Bank risk management – what is best practice?

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RECONSIDERATION OF THE BANK CREDIT ASSESSMENTS: THEORETICAL AND PRACTICAL ISSUES

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Reconsideration of the bank credit assessments theoretical and practical issues

RECONSIDERATION OF THE BANK CREDIT ASSESSMENTS:THEORETICAL AND PRACTICAL ISSUES

Alexander Rad, Olof Wahlberg, Peter Öhman and Einar Häckner

Paper presented at the ERES 2009 Conference,

Stockholm June 24-27 2009


A research program

A Research program

  • Bank risk management – what is best practice?

  • A SME loan assessment study – ”the study”

    focusing on Lending Officers (”LO”s) assessments of loan applications from Small/Medium Sized Enterprises (”SME”s)

  • Research question for the study:

    How does a LO arrive at a summary conclusion on an individual SME loan application evaluation?


Purposes of the paper

Purposes of the paper

to ...

briefly outline the theoretical frame of reference for theresearch program

and for the study to

identify information useful for bank credit assessments

discuss methods for the study

report on pilot testing of methods and assess their feasibility


Theoretical frame of reference

Theoretical frame of reference

Theories on banking and finance

Accountability theory

Cognitive theory

Institutional theory and structuration theory

Sense-making theory


Credit assessment criteria

Credit assessment criteria

A. Industry risk

B. Business concept

C. Financial statements

D. Anticipated financial standing (budgets, cash flows)

E. Company documents (reliable, verified etc.)

F. Management and board

G. Client’s record

H. Market conditions

I. Collaterals

J. The bank’s loss risk

K. The bank’s earning opportunities


The repertory grid approach

The Repertory Grid Approach

Based on Personal Construct Theory (Kelly, 1955)

We see “the world” as bipolar constructs

e.g. “Easy to assess – Difficult to assess”

Classes of phenomena in “the world” are called “elements”

e.g. “Application cases”, “LOs”, “banks” or “clients”

Constructs are used as Likert scales to score elements

The output is a matrix (grid) with the scores for each

elementon each construct

The data captured can be analyzed e.g. by Principal

Component (Factor) Analysis or Cluster Analysis


Constructs for pilot study 3

Constructs for pilot study 3

1. Easy (1) – difficult (7) to assess

2. Small (1) – large (7) influence by Basel agreements

3. Small (1) – large (7) impact on first time applicant (new client)

4. Requires future-orientated assessments to a small (1) – large (7) extent

5. Predominantly quantitative (1) – qualitative (7) information

6. Requires little (1) – much (7) time to assess

7. Little (1) – much (7) oral information

8. Predominantly objective (1) – subjective (7) assessments

9. Requires little (1) – much (1) second opinions

10. Small (1) – large (7) impact on recurring applicant (existing client)

11. Little (1) – much (7) relationship dependent

12. Small (1) – large (7) influence by the lending strategy of the bank

13. Requires little (1) – much (1) intuition

14. Small (1) – large (7) aid from decision supporting systems


Repertory grid plot pca analysis

Repertory Grid Plot - PCA Analysis

Little intuition 13

Management/board F

Much relationship dep 11

I Collaterals

11 Little relationship dep

Much intuition 13


Repertory grid plot varimax rotated pca analysis component 1

Repertory Grid Plot Varimax Rotated PCA Analysis – Component 1

Much relationship dep 11

Management/board F

Much intuition 13

10 Large imp 2nd time applicant

I Collaterals

7 Little oral information

Transac-

tion

Relationship

5 Quantitave information

8 Objective assessment

13 Little intuition

11 Little relationship dep

Subjective assessment 8

Qualitative information 5

Much oral information 7

Little impact for 2nd

time applicant 10


Repertory grid plot varimax rotated pca analysis component 2

Repertory Grid Plot Varimax Rotated PCA Analysis – Component 2

Future-oriented assessments

Large support system 14

Anticipated fin standing D

Much time consuming 6

4 Much future orientation

K Bank’s earning opportunity

Transac-

tion

Relationship

Little future orientation 4

Industry Risk A

14 Small support system

6 Little time consuming

Historically based assessments


Repertory grid plot varimax rotated pca analysis

Repertory Grid Plot Varimax Rotated PCA Analysis

Future-oriented assessments

Large support system 14

Anticipated fin standing D

Much time consuming 6

4 Much future orientation

K Bank’s earning opportunity

Much relationship dep 11

Management/board F

Much intuition 13

10 Large imp 2nd time applicant

I Collaterals

7 Little oral information

Transac-

tion

Relationship

5 Quantitave information

8 Objective assessment

13 Little intuition

11 Little relationship dep

Subjective assessment 8

Qualitative information 5

Much oral information 7

Little impact for 2nd

time applicant 10

Little future orientation 4

Industry Risk A

14 Small support system

6 Littel time consuming

Historically based assessments


Contacts

Contacts

*Mid Sweden University

Department of Social Sciences,

851 70 Sundsvall, Sweden

Authors:

[email protected]Corresponding

[email protected]

[email protected]

[email protected]


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