Credit Risk Management. A study on risk integration in the bank lending process.

Credit risk management has been a topic much written about in the last decade. Substantial credit risk losses can undermine the stability of the bank. Both banks and national bank supervisors have realized the need to invest in credit risk management. Partly driven by regulations such as the Basel II Framework, large and medium-sized banks in the Euro zone have developed their own credit risk and capital models. While this has led to improvements in credit risk predictions, banks currently forgo value by not effectively integrating credit risk management into the lending process. This research is centered on the integration of credit risk management into the lending process. The problem statement is: "How can credit risk management be integrated into the lending process and will it result in improved performance?" Although much has been written about credit risk methodologies, the subject of integration is relatively unexplored. In this research, a growth model is proposed that helps banks to integrate credit risk management into their lending process through a series of phases. For each o these phases, a bank qualifies when both organizational and methodological requirements are fulfilled. The model starts with the measurement of individual credit risk exposures, but develops towards active management of the entire loan portfolio. Full integration results when the lending process is committed to the optimization of Economic Profit in which credit risk management is an invaluable component. The growth model is tested among CFOs of large and medium-sized banks of the Euro zone of which 25 percent participated. Most banks in the questionnaire did not fully integrate credit risk management into the lending process, but they saw the need to improve it. Therefore, a framework that helps banks to achieve the integration is useful. The results show that there is convincing evidence that respondents agree with the path and the benefits of the phases of the growth model. Thus, the proposed growth model seems to be a useful framework to integrate credit risk into the lending process for these banks