In banking, a credit decision is a decision to grant , extend or decline a credit . Due to the diverse types of credit, there are also credit decisions in other branches of the economy , for example in building societies and credit insurance companies .
Credit decisions are the most important bank operational decisions because the credit business is the most important banking business . By means of work instructions , certain bank employees are appointed as decision-makers and given credit authority, whereby personal decision-making authority is granted. You set the maximum loan volume that can be approved by the decision maker per borrower. The types of credit that can be approved , their maximum credit terms and the credit collateral are factually recorded in the competence framework . Since the purchase of bonds or the sale of credit default swaps (as protection seller ) is associated with a credit risk in the form of the issuer risk or the risk of counterparty default , both credit products are included in the credit authority. The Deutsche Bundesbank has summarized the cases for which a credit decision is required:
- New loans ,
- Overdrafts ,
- Credit increases,
- Prolongations ,
- Changes to risk-relevant facts on which the loan decision was based (e.g. release of loan collateral )
- Setting of borrower-related credit limits and facilities (including counterparty and issuer limits ) and
- Holdings .
The maximum credit volume usually increases in ascending order depending on the hierarchy level, so that the management board of a bank, together with the supervisory board (or credit committee), has the highest approval authority ( multi-million loans , large loans and corporate loans ). For large loans and loans to organs, the decision-making authority is even stipulated by law. Both in the case of large loans ( (2 ) of the KWG ) as well as for loans to organs ( (1) of the KWG) a unanimous decision must be made by all managers.
Credit decisions were initially subject to the provisions on the minimum requirements for the lending business and have now been regulated since December 2012 in the minimum requirements for risk management (BA) ; both are implementing provisions of KWG. For the purposes of this Circular, any decision is considered lending decisions "on new loans, increases in credit, investments , exceeded limits, setting limits for particular borrowers as well as counterparty and issuer limits, extensions as use and risk-relevant changes facts underlying the credit decision (eg. Collateral, ) "(AT 2.3 No. 2). It is irrelevant whether this decision is made exclusively by the institute itself or jointly with other institutes ( syndicated loan ). In this sense, overdrafts are also subject to a credit decision. BTO 1.1 no. 2 stipulates that organizationally the lending decisions ( "votes") from two independent areas of the front office and the back office must be taken unanimously, with concessions are possible (BTO 1.1 no. 4). A “clear and consistent order of competencies” must ensure that in the event of differing votes, the credit is either rejected or escalated to a higher level of competency (BTO 1.1 No. 6).
The Capital Adequacy Ordinance (CRR) requires that a rating be assigned to the debtor for each credit approval (Art. 172 No. 1a CRR). This rating plays a decisive role in the burden of own funds on the approved loan , so that credit decisions also affect the offsetting of loans against own funds.
From a banking perspective , the credit decision is a decision under risk . When making a decision, the possible effects are known (total or partial loan default ), but no reliable information is available about the probability of occurrence . The event of a credit default ranges between values in the vicinity of 0 (unlikely event) and in the vicinity of 1 (probable event), only 0 (impossible event) is excluded, while 1 (certain event) is only for a few with integrity collateral ( pledge of bank deposits in-house, from federal bonds or bills of public guarantees ) secured loans applies. In the case of loan collateral, important decision-making criteria are the mortgage lending value , the lending limit and the lending period . When making decisions under risk, the decision-maker has knowledge of subjective (subjective experience and own estimates of the probability of occurrence) and objective (historical data with frequency distributions such as mortality tables or statistics on non-performing loans and insolvencies ) occurrence probabilities. Expected values can be calculated for the alternative courses of action . If such objective probabilities are present, the decisions are made at risk.
These probabilities of occurrence are expressed in the credit risk, because the contractual repayment along with interest is in the future, most loan collateral is subject to fluctuations in value and therefore the loan as a whole is subject to risk. This credit risk should the bank by the appropriate analysis of the borrower ( balance sheet analysis for companies , municipal financial statement analysis at regional , income and asset analysis for natural persons ) estimate and a rating / credit score provided. The internal rating of a bank or rating agency is the credit rating of the borrower condensed into a symbol ( rating code ; letter or number) . The decision-making authority can also be graded according to the rating code. Then it can also be determined up to which rating code credit approvals may still be granted ( English "investment grade" ). Credit decisions outside of the “investment grade” must therefore lead to a refusal to grant a loan. Credit decisions are always based on the internal regulations of the institution's risk policy .
If one applies decision- theoretical knowledge to the lending business, the decision maker has three alternative courses of action: he can refuse the granting of the loan, he can grant the loan as requested, or he can grant the credit differently than requested. The loan decision is preceded by the gathering of information , the essential basis of which is the loan application and the loan documents of the applicant. These are prepared by the loan processing department with the help of other external ( Schufa information, information from credit agencies and public registers ) and internal bank information and data sources ( account management ). This credit check includes both creditworthiness and creditworthiness checks . The result is a credit analysis that leads to a decision proposal. This summarizes the analysis and condenses the results in a credit scoring (for private customers) or rating (for companies). The positive credit decision is implemented by drawing up a credit agreement and any security agreement that contain the decision criteria. Decision control is carried out through credit monitoring and credit control.
Decision making process
The decision-making process for a credit decision is organizationally different, depending on whether it is retail or corporate financing:
- In bulk business ( overdraft facilities , consumer loans ), this is done fully automatically using a standard procedure and leads to an immediate credit decision. The data of the loan request (creditworthiness of the borrower, loan request, term, installment amount, repayment, etc.) are recorded electronically. An immediate decision is normally made using scoring procedures with stored decision rules ("if / then mechanisms"). The mechanisms are specified internally by the institute, taking into account the risk and business policy. Borderline cases are also defined ( gray cases ) in which qualified employees can still make the final decision. However, this area should i. d. Usually less than 10% of the requested cases. The majority of decisions are made regularly on so-called “red” cases (rejection) and “green” cases (approval).
- Especially in the commercial lending business and upscale private customers business ( investment loans in the corporate finance and as a municipal for municipalities, loans under the corporate finance , SME loans, international credit transactions and Private Banking ), the decision-making process made individually by credit specialists. Although these use similar scoring or rating procedures as part of the credit check, they are entitled, via internal bank authority regulations, to make the decision, especially taking rather “soft criteria” into account. Examples include a. Business start-ups , loans for new products of a company, industry and market situation or quality of management. The loan application includes a balance sheet analysis or municipal year-end analysis (recognition of credit risks, recognition and evaluation of alternatives) and is submitted to the responsible decision-makers.
Credit decisions must be documented for control purposes for bank auditing and BaFin . In bulk business, the data of the automatic decision is regularly archived electronically. In the more complex lending business, individual documentation is provided that provides information on the reasons for the decision and, if applicable, further requirements for the borrower. In both cases, the approving person or authority and the date of the decision must be evident.
Comprehensive documentation of the credit decisions is also required for their implementation. The result of a (positive) credit decision is the creation of the credit or loan agreement including possible credit terms or conditions ( disbursement requirements ) as well as any credit security to be provided by the borrower or by third parties in the security agreement on the basis of the credit decision.
- Manfred Wächtershäuser, Credit Risk and Credit Decisions in Banking Operations , 1971, p. 18
- Deutsche Bundesbank, Monthly Report January 2003 , p. 47
- BaFin circular 34/2002 (BA) of December 20, 2002
- BaFin circular 10/2012 (BA) of December 14, 2012
- Christian Decker, Internationale Projektfinanzierung , 2008, p. 142
- Ina A. Falkenstein, Risk Management with Performance-Based Remuneration , 2005, p. 35
- Edgar Saliger, Business Decision Theory , 2003, p. 43 f.
- Axel Becker (Ed.), Risk early detection in the credit business , 2008, p. 62