Seeking Solutions for Declining Credit Risk Analysis Skills (article)
For several reasons in the late 1990s, the banking industry began reducing its reliance on in-house training programs. Banks found that their investment in staff training was delivering little advantage because newly trained employees were quickly moving on in pursuit of higher salaries. Banks were asking “What if we spend the money on training and they leave?” without considering the real question, “What if we don’t train them and they stay?” This mindset had an impact on the credit analysis function that tended to be the training ground and feeder system for a bank’s commercial lending talent pool.
Many large banks also started credit scoring business loans, in some cases up to $4 million. “Credit scoring took much of the human element out of the loan approval process,” according to Jeff Judy, a trainer, presenter and consultant to financial institutions. He likens it to “knowing how to use a calculator, but not understanding the meaning behind the numbers.”
Over time, a growing percentage of bank employees lacked the basic training and fundamentals required for responsibilities beyond entry-level positions, such as the credit analysis undertaken for commercial borrowers. Performing credit analysis helps evaluate a borrower’s ability to pay on the loan, and without the proper expertise banks run the risk of engaging in riskier loans and taking in portfolios with toxic assets. The reduction in the number of banks in the U.S. over the same period had the effect of masking the problem.
Fast forward to today and one sees a talent pool gap within the credit function – a gap that is now approaching 20 years in the making. Banks have tried to resolve this issue by shifting analysis duties to higher-ranking personnel, offloading activities to the loan review or internal audit departments, or simply doing without. Industry associations and banking schools attempted to plug the hole. Although many of these programs were well-developed, they did not fully resolve the talent gap to consistently support growth and training in a meaningful way. The diminishing ranks of credit analysts cascaded to the lending function in that the undersupply of analysts ultimately led to a similar shortfall of loan officers.
In all, the above described dynamics resulted in a lost generation of analysts and commercial lenders as banks attempted to resolve the challenge by swapping talent, which was an expensive and, many times, poor outcome.
Today, market forces are at play to address this industry-wide epidemic. On one hand, several progressive banks are resurrecting the credit analyst training programs of old to attract talent into the banking industry, control the content and consistency of the training, and dictate their destinies in an intentional manner. The strategy can be time-consuming and costly, however. Therefore, this strategy is only available as an option to the larger banks with sufficient resources, while the smaller regional and community banks may not have this as a viable option.
As an alternative, an increasingly prevalent tactic is to outsource credit analysis to third-party providers. This approach is appealing for a number of reasons:
- A third party assures resources are available to satisfy a bank’s needs.
- The “seal of approval” supplied by the outsourced vendor can be depended on to be industry compliant, consistent with the requirements and goals of the lending institution, and a quality work product of professionals who specialize in the service.
- An independent third party provides an objective analysis that is less prone to the subjectivity of an internal department.
- The third party bears the burden of training staff.
- Because the bank has to staff for its peak needs even if the utilization is seasonal or fluctuates, this is a flexible on-demand solution that you pay for when you need it, as opposed to a fixed cost that is often underutilized.
Another option is to recruit the talent with the credit analysis expertise to fill in the knowledge and experience gaps within your organization. A third-party executive search firm can help evaluate a large pool of candidates while reducing the burden of the employee search on internal human resources departments.
Regardless of the approach, a clear case has been made for return on investment. Having knowledgeable staff trained in banking fundamentals is essential, whether the professionals come in with that expertise, are outsourced to a reputable third party or receive internal training. Professionals well-versed in credit analysis fundamentals can help banks ensure borrowers are equipped to pay back the loans they seek, which helps the bank avoid portfolios with toxic assets.
For More Information
Outsourcing key functions – whether credit risk analysis or the search for the right talent – can help banks address talent shortages. For more information on outsourcing the employee search, please contact Jay Meschke (816.945.5401) of CBIZ EFL Associates, a retained executive search firm. For more information on credit analysis outsourcing, please contact Jake McDonald (610.862.2202) in the CBIZ Credit Risk Advisory Practice.
Case Study: Credit Analysis Outsourcing Accrues Benefits for Bank
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