A top 25 U.S. financial institution (bank), with close to $100 billion in assets, is a wholly-owned subsidiary of one of the largest banking groups in the world. It is a full-service commercial bank providing an array of financial services to individuals, small businesses, middle-market companies and major corporations. During the summer of 2009, the bank hired a new chief credit officer (CCO), who subsequently asked Protiviti to evaluate the soundness and effectiveness of the bank’s credit risk infrastructure, given the economic stresses and portfolio deterioration.

Current situation: 

1. New senior management hired from outside of the organization
2. Economic downturn in the financial environment
3. Deteriorating balance sheet and increasing Loan Loss Reserve provisions
4. Parent company’s request for an outside perspective on the credit risk infrastructure and governance
5. Pending Basel II implementation

Protiviti’s extensive credit risk expertise and prior work experience with the bank’s board of directors led the CCO and the board’s audit committee to jointly engage Protiviti to provide an external perspective on the bank’s credit risk infrastructure and provide recommendations to enhance the credit risk management practices.

During the engagement, Protiviti reviewed the bank’s credit risk infrastructure and governance documentation, including policies and procedures, committee charters, organizational charts and multiple reporting packages. Subsequently, the team interviewed more than 50 bank employees and board directors, including members of credit management and reporting, the audit committee, the executive committee, internal audit and the business lines. Analysis was then performed on the information provided and supplemented with Protiviti’s industry knowledge and benchmarks. Through the analysis and evaluation process, Protiviti reviewed the effectiveness of each of the following for the bank: 

1. Credit risk infrastructure, including the governance framework and process
2. Alignment of the credit risk strategies and policies
3. Credit risk organizational structure
4. Asset quality, credit risk measurement and performance monitoring practices
5. Performance methodologies for the bank’s business segments
6. Adequacy of the bank’s credit review group’s capacity
7. Credit risk models, with a focus on credit loss forecasting, Allowance for Loan and Lease Losses (ALLL)
8. Methodologies and credit scoring models
9. Interconnections between the credit risk infrastructure and Basel II

Protiviti provided an unbiased outside perspective, industry knowledge, detailed observations and customized recommendations to the CCO and audit committee. Some of the recommendations provided included: 

1. Enhancement of the credit strategy, including active portfolio strategy monitoring and proactive and consistent communication
2. Enhancement of credit capital optimization strategies and analysis
3. Strengthening and build-out of the credit organizational structure and reporting lines
4. Development of multiple layers of concise and forward-looking credit risk reporting tailored to its audience
5. Simplification of commercial ALLL process and increased utilization of external data sources in consumer exposures

Where possible, Protiviti provided the bank with illustrative examples to offer additional context and support to key issues and recommendations. A supplementary list of observations noted during the review but not pertaining directly to the credit risk infrastructure was also provided. These observations related to the economic capital model, Basel II scorecards and compensation plans. The bank was very pleased with the observations and recommendations Protiviti brought to their attention and immediately began plans to enact changes.

How We Help Companies Succeed

Protiviti’s Credit Risk practice is able to offer experienced professionals in a variety of roles, ranging from the assessment and benchmarking of an existing loan review function to the performance of outsourced and co-sourced loan review services on both an ongoing basis or as part of acquisition due diligence. We help clients understand the risks in individual credits and the portfolio as a whole and improve the capability of their current functions based on our assessment of more than 30 percent of the top 25 U.S. banks’ loan review functions.

Our reviews allow management to make timely decisions regarding their credit risk exposure and mitigation strategies. In the case of transaction support, we mobilize quickly, often within 24 hours, and help companies make informed investment decisions based on an experienced review of credit risk in the target portfolio.

Protiviti (www.protiviti.com) is a global business consulting and internal audit firm composed of experts specializing in risk, advisory and transaction services. The firm helps solve problems in finance and transactions, operations, technology, litigation, governance, risk, and compliance. Protiviti’s highly trained, results-oriented professionals provide a unique perspective on a wide range of critical business issues for clients in the Americas, Asia-Pacific, Europe and the Middle East.

Protiviti has more than 60 locations worldwide and is a wholly owned subsidiary of Robert Half International Inc. (NYSE symbol: RHI). Founded in 1948, Robert Half International is a member of the S&P 500 index.