By: Mike Horrocks
I am at the Risk Management Association’s annual conference in DC and I feel like I am back to where my banking career began. One of the key topics here is how important the Risk Rating Grade is and what impact that right or wrong Risk Rating Grade can have on the bank.
It is amazing to me how a risk rating is often a shot in the dark at some institutions or can even vary on the training of one risk manager to another. For example, you could have a commercial credit with fantastic debt service coverage and have it tied to a terrible piece of collateral and that risk rating grade will range anywhere from prime type credit (cash flow is king and the loan will never default – so why concern ourselves with collateral) to low, subprime (do we really want that kind of collateral dragging us down or in our OREO portfolio?), to anywhere in between.
Banks need to define the attributes of a risk rating grade and consistently apply that grade. The failure of doing that will lead to having that poor risk rating grade impact ALLL calculations (with either an over allocation or not enough) and then that will roll into the loan pricing (making you more costly or not enough to match for the risk).
The other thing I hear consistently is that we don’t have the right solutions or resources to complete a project like this. Fortunately there is help. A bank should never feel like they should try to do this alone. I recall how it was an all hands on deck when I first started out to make sure we were getting the right loan grading and loan pricing in place at the first super-regional bank I worked at – and that was without all the compliance pressure of today.
So take a pause and look at your loan grading approach – is it passing or failing your needs? If it is not passing, take some time to read up on the topic, perhaps find a tutor (or business partner you can trust) and form a study group of your best bankers. This is one grade that needs to be at the top of the class. Looking forward to more from RMA 2014!
