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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
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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?
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Purposes of the paper
to ...• briefly outline the theoretical frame of reference for the
research 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
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Theoretical frame of reference
1. Theories on banking and finance
2. Accountability theory
3. Cognitive theory
4. Institutional theory and structuration theory
5. Sense-making theory
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Credit assessment criteria
A. Industry riskB. Business conceptC. Financial statementsD. Anticipated financial standing (budgets, cash flows)E. Company documents (reliable, verified etc.)F. Management and boardG. Client’s record H. Market conditionsI. CollateralsJ. The bank’s loss risk K. The bank’s earning opportunities
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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 element on each construct
• The data captured can be analyzed e.g. by Principal Component (Factor) Analysis or Cluster Analysis
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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 opinions10. Small (1) – large (7) impact on recurring applicant (existing client)11. Little (1) – much (7) relationship dependent12. Small (1) – large (7) influence by the lending strategy of the bank13. Requires little (1) – much (1) intuition14. Small (1) – large (7) aid from decision supporting systems
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Repertory Grid Plot - PCA Analysis
Management/board FMuch relationship dep 11
11 Little relationship dep Much intuition 13
I Collaterals
Little intuition 13
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Repertory Grid Plot Varimax Rotated PCA Analysis – Component 1
Much relationship dep 11Management/board FMuch intuition 13
Subjective assessment 8Qualitative information 5Much oral information 7Little impact for 2nd time applicant 10
10 Large imp 2nd time applicant I Collaterals 7 Little oral information 5 Quantitave information 8 Objective assessment13 Little intuition11 Little relationship dep
RelationshipTransac-tion
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Repertory Grid Plot Varimax Rotated PCA Analysis – Component 2
4 Much future orientationK Bank’s earning opportunity
Large support system 14Anticipated fin standing DMuch time consuming 6
Little future orientation 4Industry Risk A
14 Small support system 6 Little time consuming
RelationshipTransac-tion
Future-oriented assessments
Historically based assessments
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Repertory Grid Plot Varimax Rotated PCA Analysis
4 Much future orientationK Bank’s earning opportunity
Large support system 14Anticipated fin standing DMuch time consuming 6
Little future orientation 4Industry Risk A
14 Small support system 6 Littel time consuming
Much relationship dep 11Management/board FMuch intuition 13
Subjective assessment 8Qualitative information 5Much oral information 7Little impact for 2nd time applicant 10
10 Large imp 2nd time applicant I Collaterals 7 Little oral information
5 Quantitave information 8 Objective assessment13 Little intuition11 Little relationship dep
RelationshipTransac-tion
Future-oriented assessments
Historically based assessments
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Contacts
*Mid Sweden University
Department of Social Sciences,
851 70 Sundsvall, Sweden
Authors: [email protected] Corresponding
