Commercial banks are increasingly seeking new business opportunities that do not fit the traditional credit approval and review process established for managing counterparty credit risks as a lender.
For the sake of the banks' financial health, and because regulators are requiring these business risks be addressed, institutions must develop new processes to evaluate counterparty risk in a non-credit context.
The individuals responsible for new nonlending business development usually do not have credit training. They are entrepreneurial, high-energy individuals who project enthusiasm into their work.
These sales professionals, officers, and managers are driven to generate increased fee income and revenues by aggressive selling. Given the right (or wrong) combination of factors, the potential for booking higher risk transactions exists.
While it is true that the fee-generating businesses such as corporate trust, investment management, and custody have a significantly lower risk profile than lending or other direct credit provision activities, it is also true that, for cost considerations, the high volume of relatively low- profit deals precludes the kind of detailed analysis of each transaction that characterizes counterparty risk management in traditional commercial banking.
Nevertheless, some screening of counterparties is appropriate for two primary reasons:
First, even if direct dollar exposure is not involved, the institution may be exposed in other ways that could result in income loss, such as reputation and "deep pocket" risk.
Second, the account parties involved frequently will require and expect that services with a credit component - such as overdrafts or foreign exchange - be provided as part of the relationship.
The development of an effective screening process is necessary to enable the institution both to identify those customers and transactions requiring additional analysis and to reap the benefits of new markets and products.
Avoiding the pitfalls of undesirable commitments and liabilities can be facilitated through a system of dual supports with one component consisting of business-unit-based risk management and the other, more centralized component involving risk management expertise at the corporate level.
The client-screening process should be simple enough for marketing and sales professionals without credit training to administer quickly and easily with a minimum of instruction.
The screening should allow approximately 95% to 98% of prospective new business pass through without further intervention.
The 2% to 5% that the screening process identifies as requiring further review should be handed off to the business unit risk officer on the sales support team.
The person in this position, who reports to the same business unit manager, is also keen to book business. However, this individual should be credit trained and sensitive to the importance of preserving income, enabling it to hit the bottom line and become net profit, rather than being focused solely on bringing it in to the top line (gross revenue).
This individual can also evaluate whether involving the centralized credit and risk policy area in the approval process is appropriate.
Commercial banking officers make excellent candidates for the business unit risk manager role - real estate lending in the case of corporate trust - and can bring relevant expertise and a useful perspective to this job.
Creating such a position can provide both the organization and the individual with unique career development opportunities.
Ms. Borke is a vice president at the State Street Boston Corp. flagship.
