There’s anecdotal evidence that credit training in community banks is in decline. But I wonder if we have industry consensus among lenders and lending managers about what credit training should include today.
This has me thinking about what we really expect lenders to do these days. What should lender job descriptions emphasize? Are we looking at the world as we expect it to be? Or as we understand it has been? Is legacy thinking superseding or obstructing strategic thinking and analysis?
As we look forward in our current business environment after a long and deep recession followed by a long recovery, what are we really expecting lenders to be able to do?
If we’re not clear on that basic question, then how we can we attract the right talent, evaluate it, not to mention retain, incent, and promote incumbent employees?
Absent a core sense of what we need for the future, our human resource management will be essentially incoherent.
Roots of today’s issues
Here’s how the problem seems to be progressing. Starting 20 or so years back, banks began to seriously work at eliminating the heavy salary component in the credit underwriting function. There are two “short cuts” to this process.
First, many banks, including increasingly larger banks that “crowd” the definition of community banking, are viewing small- to medium-sized commercial lending transactions as retail products. This owes to the manner in which the product is delivered.
Salespeople, steeped in a sales but not necessarily in a credit culture, and incented generously, steer prospects to the nearest branch. Credits are then underwritten centrally. It’s hard to argue that the process isn’t more efficient in the labor component sense.
There are also some specific advantages that accrue as well, principally that documents are drawn concurrent with the underwriting process and the process is rigidly standardized. Usually this results in markedly lower credit and collateral exceptions.
Second, the use of computer technology and the relatively high degree of reliability of credit scoring models acquired over the years applied originally to retail lending transactions has been harnessed to process smaller commercial credit transactions. The predictive value of past behaviors has been demonstrated to be quite reliable as applied to commercial borrowers and is certainly more cost efficient.
Consequences of credit evolution
There are long-term consequences of these developments in the relatively fewer formally trained credit analysts who now work for banks compared to 15 and 20 years ago. The likelihood of turning back the clock is pretty low. But there are unintended consequences and they are not trivial.
Here’s my list of the obvious impacts:
1. Do branch staffs have the ability (and the opportunity) to spot cross-selling opportunities among borrowing customers? Have they been trained formally or informally to do this?
2. How well served is the community when there are many fewer knowledgeable staffers with specific credit skills to apply to local opportunities to finance and build infrastructure? Or to spot problems when they are still small and manageable?
3. What are the long-term implications to staffing credit and lending positions in banks when the talent pool has been allowed to diminish, as seems to be currently happening? What will the labor cost be when banks are required to “pay up” for talent?
Credit: art or science?
Successful lending is the blending of components of art and science. The process is artful in the sense that the banker recognizes an unmet need and attempts to bridge the gap. It’s science in that lending requires the careful and thorough application of lending principles. Too much science and too little imagination leaves cross selling and development opportunities unfilled. Too much art and not enough science leads to a loan portfolio without a thorough assessment of credit portfolio risk.
We need both and that means we need people capable of doing both, of being both mechanic and artisan.
What are the behavioral traits that are inclusive of the best of both? To my way of thinking, we used to do a pretty good job figuring this out. Commercial lenders were described not so many years ago generally as conservative, thoughtful, helpful, analytical, and serious about building both their local communities and the financial integrity of their customers. That’s what attracted me and most of my age cohorts into the business years ago.
I know that at some banks, this environment still exists. Training is formal, thorough, ongoing, and systemic through a series of planned workflows (credit analysis, formal class room opportunities, credit committees, etc.).
Generally, though, this describes the environment that tends to exist in greater numbers at larger banks. Smaller banks—and that can include some pretty big banks with asset totals into high seven figures—who are, consciously or otherwise, simply not training a replacement generation for their late-career lenders facing retirement in the relatively near future.
Where are the new people going to come from? Big bank training programs, where they still exist, cannot turn out the numbers that the industry of all sized banks will need 10 and 15 years from now nor would all lenders comfortable in a big bank environment necessarily prefer a community bank environment.
Then what? Does the credit function shut down for lack of talent and experience?
Glimpse at a possible future?
No, that’s not likely. Instead two things will likely develop.
First will be a dearth of lending talent, and that’s a scary prospect for an industry where the principal risk has always resided in the lending function.
We will become to a degree an industry that doesn’t know what it doesn’t know.
Maybe we’ve been looking at the tip of that iceberg for a while now.
Or, we’ll create a bubble of demand for formally trained credit people. Will these people become a sort of “royal class” among bankers for the skills they have acquired? Or will we stumble along and not really sense who we are or what we need to succeed over the long haul?
This is not a very optimistic outlook.
But the glass may in fact be half full.
Community bankers are an imaginative and adaptive bunch. This is now the second-longest economic cycle in our history and simply put, one day sooner than later, it’s going to end. That’s likely to be our wakeup call. There will be time to do something talent wise for the long-term good of the industry despite the current trends. We just need to be able to spot the opportunities and react quickly.