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?
• 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?
2
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
3
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
4
Credit assessment criteria
A.
B.
C.
D.
E.
F.
G.
H.
I.
J.
K.
Industry risk
Business concept
Financial statements
Anticipated financial standing (budgets, cash flows)
Company documents (reliable, verified etc.)
Management and board
Client’s record
Market conditions
Collaterals
The bank’s loss risk
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 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
7
8
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Repertory Grid Plot - PCA Analysis
Little intuition
13
I Collaterals
11 Little relationship dep
Management/board
F
Much relationship dep 11
Much intuition
13
10
Repertory Grid Plot
Varimax Rotated PCA Analysis – Component 1
10 Large imp 2nd time applicant
I Collaterals
Transac- 7 Little oral information
tion
5 Quantitave information
8 Objective assessment
13 Little intuition
11 Little relationship dep
Much relationship dep 11
Management/board F
Much intuition
13
Relationship
Subjective assessment 8
Qualitative information 5
Much oral information 7
Little impact for 2nd
time applicant
10
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Repertory Grid Plot
Varimax Rotated PCA Analysis – Component 2
Future-oriented assessments
Large support system
Anticipated fin standing
Much time consuming
14
D
6
4 Much future orientation
K Bank’s earning opportunity
Transaction
Relationship
Little future orientation 4
Industry Risk
A
14 Small support system
6 Little time consuming
Historically based assessments
12
Repertory Grid Plot
Varimax Rotated PCA Analysis
Future-oriented assessments
Large support system
14
Anticipated fin standing
D
Much time consuming
6
10 Large imp 2nd time applicant
I Collaterals
Transac- 7 Little oral information
tion
5 Quantitave information
8 Objective assessment
13 Little intuition
11 Little relationship dep
Little future orientation 4
Industry Risk
A
4 Much future orientation
K Bank’s earning opportunity
Much relationship dep 11
Management/board F
Much intuition
13
Relationship
Subjective assessment 8
Qualitative information 5
Much oral information 7
Little impact for 2nd
time applicant
10
14 Small support system
6 Littel time consuming
Historically based assessments
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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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