The foundation of First Union's credit management system is a data base called the commercial bank solution, or CBS. Rolled out in the fourth quarter, it contains everything First Union knows about its commercial borrowers.

From the first meeting with a loan officer to final payoff, details of every customer interaction are recorded. The data base can produce aggregated reports, too, such as a list of all loans to specific types of businesses.

"This gives us a way to have all the information on borrowers located centrally," said Ava Turner, First Union's vice president for commercial banking solutions.

Once a customer applies for credit, an underwriter, consulting with the loan officer, assigns one of 16 ratings to the likelihood the borrower will default, one of 16 ratings to the likelihood the loan will default, and one of seven ratings to the expected loss if default occurs.

All new loans are rated, and all existing loans will be run through the system by yearend. Most ratings are updated at least annually to ensure accuracy.

These grades are critical because they determine how much First Union will charge for the loan and how much capital it should retain.

With so much depending upon credit risk grades, the bank also uses two computer models to verify the ratings and ensure their consistency. One model uses financial data to calculate expected default rates, and the other creates a computerized rating based on financial performance data.

Once a credit rating has been established, another model is used to predict the profitability of each loan and each banking relationship.

"We want to look at all the possible loans and cherry pick the ones that are most profitable for us," said Mark Southern, vice president and manager of the portfolio strategies group. That means the bank may be willing to accept riskier loans, provided it is being adequately compensated, he said.

About 1,500 employees are authorized to assign credit ratings, and First Union goes overboard to ensure they are accurate. "We need to protect ourselves from the underwriter that goes off the deep end," said James B. Wolf, senior vice president at First Union and architect of the system.

Safeguards include a 100-employee credit risk review team, whose leader reports to Mr. Wolf and to the audit committee of First Union's board of directors.

"If the review team says, 'Change the rating,' then we change the rating," Mr. Wolf said. "They are the last word."

About half of all new credits, by dollar amounts, are reviewed within 30 days of closing.

Two more legs of the credit risk management program monitor the overall risk of the entire loan portfolio.

One pulls data from 15 computer systems and lets the bank do corporation-wide analyses of its exposure to specific businesses and industries. "This lets us observe trends in the portfolio over time," Mr. Wolf said.

Because loan ratings are updated at least annually, risk managers can use the data base to monitor the movement of credits among the 16 risk grades. Regulators consider this type of analysis critical because persistent movement to lower credit-quality ratings is a red flag.

The second model uses economic data to identify industries that have volatile earnings, cash flows, or margins. This helps the bank better understand the performance of borrowers from these industries, Mr. Wolf said.

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