Credit policy institute

Introduction
Given that the primary reason identified in surveys, by regulators, and researchers for the current, and past, credit crisis is a ‘gradual’ decline in credit standards, it seems it is time to try a different approach. The Credit Policy Institute (www.creditpolicyinstitute.org) is the first 501c3 research and education based non-profit association focused on working with a variety of financial, academic, and non-profit institutions to help assure that banks, regulatory agencies, and policy makers have access to collaboratively developed and empirically validated credit policy standards and best practices. The goal is to try and find a solution to what seem to be commonly agreed upon issues that continue to be inadequately addressed - at least in the major institutions that account for the vast majority of the losses.
To begin with, banking executives, as will as taxpayers, are concerned with keeping financial institutions’ credit processes aligned with emerging market realities, as such a key issue is understanding how to better manage and optimize regulatory capital requirements
while meeting borrower and investor requirements . A critical success factor in this effort is the development and implementation of effective credit policy and practices
. However, while the Further Readings listed below demonstrate that there has been a robust debate about various approaches, to date there has been no empirical analysis of actual bank credit policy and practices, only very high level surveys of bankers and regulators as to their views on changes in lending ‘standards’ without any examination of the actual standards. The Institute’s efforts are focused on helping banks and regulators finally justify the steps necessary to mitigate future credit ‘boom and bust’ cycles.
Consequently, the Institute's primary mission is to provide the infrastructure to help the industry define, standardize, document, and share credit policy best practices, and allow bankers and regulators to free up related resources for other purposes. Without an empirical examination of actual credit policies and practices and there potential related impact on loan portfolio performance, it is unclear how more effective approaches can be identified and publicly supported.
To accomplish this mission, the Institute's first order of business is working with senior credit executives to help securely collect and analyze a cross-section of the industry’s existing credit policies and practices. To date, the discussions reinforce previous anecdotal indications that there is not uniform agreement as to what even basic terms like credit policy or guideline mean, much less commonly agreed ’standards’ or ‘best practices’ (Economist, 2008). The project is beginning with commercial real estate (CRE), the sector that seems to be the most current concern (Davenport, 2008), and over time will expand to cover other credit products such as Equipment Finance, SBA, and Asset Based Lending.
The Institute will incorporate evolving best practices and regulatory requirements through on-going interaction with the appropriate stakeholders.
Discussion Topic
There is an ongoing debate about the existence of generally accepted credit policy standards and best practices, as well as their impact on a bank’s competitive ability and long term business survival. In general, this topic relates to how industries identify and implement effective operating standards and what, if any, role they play in corporate governance? Consequently, this article is meant to be an evolving discussion of this topic, with the hope that contributors from around the world will help inform and direct it.
Knowledge gap this Discussion will Fill
There are ‘espoused’ industry credit policy standards and generally recognized best practices; however, there are loan performance differences which raise a question about the adequacy of existing credit policy and/or how it is implemented . While it is assumed they play a positive role, there is no research on whether the banking industry has defined and accepted any CRE credit policy and practice standards, nor what, if any, specific role ‘standards’ may play in loan portfolio performance. There are surveys of whether a bank’s ‘lending standards’ have tightened or loosened, but no information on what those standards were before or after the survey.
Business Challenge this Discussion will Help Address
CRE lending has historically been a highly competitive and volatile market subject to boom and bust cycles. Is there a way to improve existing credit policy and practice, or its implementation, to help banks more effectively manage through these cycles?
Management Theory That Is Being Considered
Credit risk, Risk management, Organizational effectiveness, Behavioral economics, and Implementation theory
Discussion Questions
A. Have banks adopted the 2006 CRE Regulatory Guidance as the basis for their credit policy and practices ?
B. Have banks agreed that there are credit policy and/or practice ‘standards’, and what, if any, gaps exist and why ?
C. Is there any relationship between existing policies and/or supporting practices and loan performance ?

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