Lending and Credit
Core activity in commercial banking involving assessing and managing credit risk.
Loan Portfolios
Mix of assets like real estate, C&I, consumer, and agricultural loans held by banks.
Loan Classifications
Includes Real Estate, Commercial (C&I), Consumer, Agricultural, Government, and Other loans.
Credit Process
Framework for assessing, approving, and monitoring loans through analysis, execution, and review.
Credit Analysis
Screening borrowers to reduce adverse selection.
Credit Execution
Structuring and contracting loans to align incentives and limit risk.
Credit Review
Monitoring loans to reduce moral hazard.
Credit Philosophy
Management’s stance on acceptable risk and focus (e.g., C&I vs. consumer).
Credit Culture
Principles guiding how risk is analyzed; value-, earnings-, or growth-driven.
Type I Error
Denying a good borrower; a missed opportunity.
Type II Error
Approving a bad borrower; may lead to default.
Five C’s of Credit
Character, Capacity, Capital, Collateral, and Conditions.
Character
Borrower’s reputation and reliability.
Capacity
Borrower’s ability to repay debt from income or cash flow.
Capital
Borrower’s own investment providing a cushion for losses.
Collateral
Assets pledged as loan security; perfected when senior to other claims.
Conditions
External factors affecting repayment ability, like economy or industry.
Liquidity Ratios
Measure ability to meet short-term obligations (e.g., Current Ratio).
Leverage Ratios
Assess balance between debt and equity (e.g., Debt-to-Equity).
Coverage Ratios
Measure ability to cover interest and principal payments (e.g., DSCR).
Loan Covenants
Conditions in loan agreements to maintain or restrict borrower actions.
Credit Enhancements
Risk mitigation tools like collateral, guarantees, or credit default swaps.
Loan Syndication
Multiple lenders share a large loan, led by a lead arranger.
Installment Loans
Repaid in fixed payments over time, usually fully amortized.
