Summary BM AJ
Lecture 1 Introduction
A bank can be defined in terms of:
1. Economic function it performs (i.e. financial intermediation)
2. Services it offers to its customers, however, changing profile.
3. Legal basis for its existence.
→ old definition: a bank is any business offering deposits subject to withdrawal on
demand and making loans of a commercial or business mature.
→ new: Any institution that could qualify fir deposit insurance administrated by the
Federal Deposit Insurance Company (FDIC)
Exam question: The book is very American based, the lectures are more European based.
You should know differences between the two.
Note: What is the difference between a loan and an investment? → The difference lies in
the risk management. The loan has to be repaid.
Note: Basic structure of a bank is important to know for the exam. There will be NO
question about duration in the exam.
Operational risk: People make mistakes → Fraud → Systems go down → Theft etc.
Reputational risk: a resulting risk from each of those activities. (Remember ING money
laundering)
1
,Notes:
1st: voorbeeld → relations manager zegt: als de risk afdeling het goed keurt boeit mij het
verder niet. ‘It’s out of my hands’ → Dit is niet goed. Alle medewerkers zouden zich
verantwoordelijk moeten voelen voor wat de bank doet. Dit is de first line of defense.
2nd: Double check
3rd: Check whether the processes and procedures are followed.
Note: Credit Principles & Credit Policy (within the risk framework) describe how
specific/individual risks are covered.
Note: Procedures and work instructions are an explicit part of the risk framework. 1. They
have to be aligned with the whole framework. 2. They apply to the whole bank/all branches.
2
, Lecture 2
Credit Risk Management (The Credit Function)
Note: In a typical bank loans are about 75% of the balance sheet total
Steps in the lending process (Book chapter 16)
1. Finding Prospective Loan Customers
2. Evaluating a Prospective Customer’s Character and Sincerity of Purpose
3. Making Site Visits and Evaluating a Prospective Customer’s Credit Record
4. Evaluating a Prospective Customer’s Financial Condition
5. Assessing Possible Loan Collateral and Signing the Loan Agreement
6. Monitoring Compliance with the Loan Agreement and Other Customer Service
Needs
Steps lending process (Slides)
1. Who is my borrower?
2. What is the purpose of the loan?
3. How will the loan be repaid (sources) and what is the likelihood of repayment?
Stages of the credit process (Slides)
1. Information → Does the potential client fits the strategy of the bank?
2. Evaluation → who is our legal counterparty and what is the credit base?
→ Remember: Business risk (4M, 2C), Financial risk (Profitability, Liquidity &
Solvency) and structure risk (Org. chart) the counterparty and the bank are facing.
Note: Remember hockey stick shaped expectations of the client’s profit etc. You as a bank
should assess whether these expectations could be too positive and adjust where needed.
3. Formalization & Credit Decision
4. Documentation & Disbursement → Conditions, collateral, debt priority and
covenants
5. Monitoring
6. Repayment
Note: At point 4 the relation between the bank and the borrower changes. The bank now
hands over the money.
Risk analysis (part of evaluation):
1. Business risk
→ Macro, Market, Manufacturing, Management, Concentration and Contingency
2. Financial risk
→ Profitability, Liquidity and Solvency
3. Structure risk
→ Holding Company Risk → Discussion with the client: Where do you put the
money!? Where is the negotiation power? → Big companies tend to have all the
power and just say to a bank ‘are you in or out?’. Small and medium enterprises
have far less negotiation power compared to the bank.
→ Intercompany lending
→ Change of ownership
3
Lecture 1 Introduction
A bank can be defined in terms of:
1. Economic function it performs (i.e. financial intermediation)
2. Services it offers to its customers, however, changing profile.
3. Legal basis for its existence.
→ old definition: a bank is any business offering deposits subject to withdrawal on
demand and making loans of a commercial or business mature.
→ new: Any institution that could qualify fir deposit insurance administrated by the
Federal Deposit Insurance Company (FDIC)
Exam question: The book is very American based, the lectures are more European based.
You should know differences between the two.
Note: What is the difference between a loan and an investment? → The difference lies in
the risk management. The loan has to be repaid.
Note: Basic structure of a bank is important to know for the exam. There will be NO
question about duration in the exam.
Operational risk: People make mistakes → Fraud → Systems go down → Theft etc.
Reputational risk: a resulting risk from each of those activities. (Remember ING money
laundering)
1
,Notes:
1st: voorbeeld → relations manager zegt: als de risk afdeling het goed keurt boeit mij het
verder niet. ‘It’s out of my hands’ → Dit is niet goed. Alle medewerkers zouden zich
verantwoordelijk moeten voelen voor wat de bank doet. Dit is de first line of defense.
2nd: Double check
3rd: Check whether the processes and procedures are followed.
Note: Credit Principles & Credit Policy (within the risk framework) describe how
specific/individual risks are covered.
Note: Procedures and work instructions are an explicit part of the risk framework. 1. They
have to be aligned with the whole framework. 2. They apply to the whole bank/all branches.
2
, Lecture 2
Credit Risk Management (The Credit Function)
Note: In a typical bank loans are about 75% of the balance sheet total
Steps in the lending process (Book chapter 16)
1. Finding Prospective Loan Customers
2. Evaluating a Prospective Customer’s Character and Sincerity of Purpose
3. Making Site Visits and Evaluating a Prospective Customer’s Credit Record
4. Evaluating a Prospective Customer’s Financial Condition
5. Assessing Possible Loan Collateral and Signing the Loan Agreement
6. Monitoring Compliance with the Loan Agreement and Other Customer Service
Needs
Steps lending process (Slides)
1. Who is my borrower?
2. What is the purpose of the loan?
3. How will the loan be repaid (sources) and what is the likelihood of repayment?
Stages of the credit process (Slides)
1. Information → Does the potential client fits the strategy of the bank?
2. Evaluation → who is our legal counterparty and what is the credit base?
→ Remember: Business risk (4M, 2C), Financial risk (Profitability, Liquidity &
Solvency) and structure risk (Org. chart) the counterparty and the bank are facing.
Note: Remember hockey stick shaped expectations of the client’s profit etc. You as a bank
should assess whether these expectations could be too positive and adjust where needed.
3. Formalization & Credit Decision
4. Documentation & Disbursement → Conditions, collateral, debt priority and
covenants
5. Monitoring
6. Repayment
Note: At point 4 the relation between the bank and the borrower changes. The bank now
hands over the money.
Risk analysis (part of evaluation):
1. Business risk
→ Macro, Market, Manufacturing, Management, Concentration and Contingency
2. Financial risk
→ Profitability, Liquidity and Solvency
3. Structure risk
→ Holding Company Risk → Discussion with the client: Where do you put the
money!? Where is the negotiation power? → Big companies tend to have all the
power and just say to a bank ‘are you in or out?’. Small and medium enterprises
have far less negotiation power compared to the bank.
→ Intercompany lending
→ Change of ownership
3
