Supercharging Loan Analysis

By Arscott, Richard B. | American Banker, June 25, 1992 | Go to article overview

Supercharging Loan Analysis


Arscott, Richard B., American Banker


During the last 10 years, the reduction and control of loan losses and chargeoffs has become a major managerial challenge for financial institutions.

The root of the problem has been failure to adapt the credit review process to a wide variety of analytical challenges.

How many times at loan committee meetings have you or someone you know been asked a question you couldn't answer fully, because information access was inadequate?

Maybe the problem was with physical access, such as someone else having portions of the credit file. Maybe some legwork analysts usually do to fill information gaps was lacking.

And maybe the right kind of strategic information is not being gathered.

Analytical Insights

Research by my associate Hassell H. McClellan of Boston College's Wallace E. Carroll School of Management has shown that application of strategic analysis techniques to credit analysis would improve the decisions made.

In his book, "Managing One-Bank Holding Companies," Prof. McClellan combined a review of bank managementt and lending practices with an examination of the loan-loss patterns of a sample of banking institutions.

A key conclusion was that loan analysis based primarily on traditional financial and historical credit information gives short shrift to strategic factors that identify borrowers whose operations will remain credit-worthy over the life of a loan.

Prof. McClellan suggests that major institutions can lend more efficiently by integrating strategic analysis better into the credit approval process and expanding the information basis upon which loans are extended.

Obstacles

For several reasons, it is hard to implement strategic analysis techniques in the loan review analysis process.

* Traditional lending practices tend to be plagued by "analysis myopia," relying primarily on historical financial information instead of forward-looking data.

Historical information does not identify the projective factors of change that contribute to flaws in initial loan decisions and undetected erosion in outstanding loans.

* Many banks have tried to capitalize on learning curves in analysis by creating lending groups that specialize in particular industries.

A better idea would to specialize the analysis function, creating a strategic analysis unit on which individual lending groups could rely.

* If the lending process becomes overly routine, economies of scale in credit analysis can have diminishing marginal returns.

New loans tend to receive the most scrutiny; ongoing review is exemplified by monitoring the loan covenants, not by evaluating threats to the success of the loan by unforeseen factors.

Many Data Sources

Computer systems are available today that can provide timely, reliable information and that let the user perform a series of structured analyses in minutes.

A wealth of business information is available via data bases residing within the institution as well as from external data sources. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • A full archive of books and articles related to this one
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Supercharging Loan Analysis
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

    Already a member? Log in now.