Jeff Judy

Jeff's Thoughts - July 8, 2009

I Take Exception . . .

I frequently consult with community banks about their cultures, about the consistency of their vision, their practices, their beliefs and habits, both across locations and across organizational levels. Sometimes they need my help to develop a common approach when mergers and acquisitions bring several different approaches together in one institution.

More often, to tell the truth, I help the leadership in established banks figure out why outcomes don't match expectations. At least a part of the answer, many times, is that the people delivering services at the front lines have a different understanding of how things are supposed to work than does top management. They lack a unified culture, a shared vision and common set of principles that shapes how people at all levels do their jobs -- especially in those grey areas where the "rule books" don't give easy answers.

As you would expect, one area that breeds different approaches within a single organization is credit policy. And I hear, in my consulting work with banks, that some of them think the best sign of a good credit policy is the complete lack of exceptions. In other words, some people feel that whenever exceptions to policy occur, they are symptoms of problems.

Usually this view is more strongly held among the staff who have to deal with those exceptions -- analysts, credit review/audit, and administrative staff. But I see it, to some extent, among credit staff of every job description. As I gather information about the shared culture across the institution, I'll find significant numbers of employees who basically say, "We have a good credit policy, a good strategic plan for our credit business, but if we were really following that credit policy, exceptions wouldn't happen."

I believe that in a well-run bank, the level of exceptions must be close to what is expected. But I also believe that while most boards and executive teams do not want exceptions to be very common, routine occurrences, neither should they expect there to be no exceptions to loan policy.

A credit policy is necessarily a broad target for credit practices. Rather than documenting every single credit transaction you could possibly engage in, it presents guidelines that should be clear enough to handle most situations. Yet every customer is unique to some extent, and every bank has to decide their own limits for accommodating that uniqueness.

We are all well aware of the problems that come with granting every customer an exception, of doing an end-run around policy at every opportunity. But we need to equally prepared to see where exceptions are, in fact, sound credit practice. We need the flexibility to adapt, while maintaining a sound, safe approach to lending.

I tell my clients that the fact that exceptions continue to occur is not necessarily, in itself, a cause for alarm. What is important is that some employees feel that the level of exceptions are not appropriate, that they are seen way too frequently in their credit business. And when different employees in different functions have different ideas about how credit business is supposed to be done, you waste a lot of time dealing with those internal differences of opinion.

Take explicit steps to, first, set expectations, and then, to regularly communicate them to everyone involved in the credit process. Make sure people know more than just what the policy says. Make sure they know how you expect that to play out in the real world, with your customers.

Your staff will waste a lot less time and energy in internal conflicts and endless, repetitive discussions if they truly understand what the bank leadership means by "effective implementation of credit policy." Your employees will face fewer internal hassles, your customers will get a clear, consistent message from everyone they deal with, and you'll gain yet another competitive advantage over your rivals who thought their work was done once their credit policy was written.