Excuse me—you're standing on my bonus … reflections on credit culture

RMA Journal, The, May, 2005 by David H. Wesley

Translation: Despite clear warnings of financial deterioration, volume generation is more important than quality or profitability.

We really need to stretch on this deal.

Translation: We need to relax our credit standards and underprice the deal in order to make our production targets and for the relationship manager to get a bonus.

While the preceding is tongue-in-cheek, the value of prudent credit risk management and the need to manage credit risk better should not be underplayed. Asset quality, profitability, and volume are interdependent and, at times, conflicting. Success in our industry is a function of discipline and consistent execution. We have to maintain and sustain a balanced risk-reward perspective. There has to be a more thoughtful, disciplined approach to credit risk management.

When rewarded solely on the basis of "bringing in the deals," we develop a book-and-forget mentality. By not demanding clear accountability or ownership for the performance of a lender's portfolio, we cultivate an environment in which maintaining the quality of credits already on the books is not emphasized. Lack of ownership is further exacerbated if management does not have a good way to measure and monitor relationship manager performance and therefore is hesitant to assign accountability. Relationship managers who consistently, shamelessly, and aggressively put their self-interest above the bank's best interests cannot and should not be tolerated. When the originations effort is not balanced by quality and profitability controls, problems inevitably occur.

The market's retribution for mismanagement of credit risk is swift, severe, and sobering. While a bank might lose some business because a competitor is willing to do the deals, its strategic credit risk management decisions should unequivocally and consistently be in the best interest of the shareholders, clients, and employees. Volume generation at the expense of asset quality and profitability should not be tolerated. Consistency is key to managing the upside potential and the downside risk when creating shareholder value, optimizing performance, and avoiding reputational impairment. Remaining disciplined and diligent in our credit risk management practices is not an option--it is a matter of survival.

Contact Wesley by e-mail at David.Wesley@Regions.com.

David Wesley is senior vice president and senior regional credit director for Regions Bank, a regional bank headquartered in Birmingham, Alabama. He's been in banking for 31 years; his last contribution to The RMA Journal was in 1993.