In an age where the short-hand language of Twitter and texts rules, why is formal credit writing still relevant for structured loans and leases? After all, when I have questioned analysts after reading an analysis that lacked depth, nearly every one could answer my questions and then some. They clearly understood their credits. So why is that not enough? Here are some thoughts from the perspective of the people relying on credit request memos and periodic account reviews.
Approvers need a complete analysis in a concise way.
Many credit cultures rely on in-person meetings to talk through issues when approving a new deal or reviewing the portfolio. However, in today’s ever-demanding and fast-paced environment, schedules do not always permit in-person meetings. Meetings often address only the top issues due to time constraints, whereas the approver needs the full picture of a credit quickly. A concise and meaningful memo will not only provide the facts, but also will analyze drivers and form an opinion on sustainability. An approver can use this information to make an informed decision.
The next analyst needs a roadmap.
Analysts for a given account will come and go. When a new analyst is assigned, she will likely first review the credit approvals and account reviews to understand the history and the key risks that she needs to watch. Financial institutions expect analysts to maintain credit files to document the history and life cycle of the credit. Poorly written or non-existent memos mean a much longer learning curve for the next analyst, along with the potential for missing something in the meantime.
Regulatory agencies need a standalone explanation.
I have been through a number of credit risk reviews and examinations by various federal and state banking regulators. Occasionally, an examiner who likes talking to analysts comes along and requests a conversation on every account because that is his style. However, the vast majority of examiners believe that the credit file should stand on its own. The examiner is likely to cite a credit administration weakness if the credit file does not adequately explain decisions made and the state of the customer. Whether that finding impacts only the credit or the whole exam is irrelevant; it is a finding that can and should be avoided with strong documentation.
It is for these reasons that formal credit writing still matters.
Although it can be a hard practice to maintain in today’s environment, the benefits both internally and externally are worth the effort.