Credit Committee: How a Bank's Panel Decides

Banks divide lending power on a ladder. The board sets the appetite and, directly or through management, the authority structure; individuals hold personal limits that reflect their experience; and a committee takes what those limits cannot. The international guidelines describe approval as being by an individual, jointly or by a committee, depending on the size and nature of the credit, with authority matched to expertise. Australian prudential guidance also notes that institutions often benefit from specialist credit committees or groups.

The point of a group is to separate optimism from authority. A relationship manager owns the client and wants the deal. The people deciding have not spent six months winning it. Their value lies in distance, and in the fact that a decision they have minuted can be examined later. Australia's standard requires an institution to identify the approval authority for each exposure so it is clear who is accountable for the credit decision.

Composition varies. Members are usually senior credit officers, sometimes joined by business heads who may speak but not vote, and a quorum rule sets how many must be present. Some committees vote; others work to consensus with the chair or senior credit officer holding a veto. Many banks limit how far commercial staff can take part in the decision. The credit authority matrix, rather than the size of the request alone, sets what reaches the room, and it usually counts the customer's whole group.

A maker of refrigerated display cabinets for food retailers, constructed for this page like every figure in it, asks its bank for a further US$8m to build a second production line. Its group already has a US$9m term loan and a US$5m revolving facility. Group EBITDA is US$7.5m. In this bank's matrix, two senior credit officers may sign up to US$15m at the borrower's grade. All these limits are the example's. US$ millions below.

A US$8m request would have been within the officers' limit by itself. The file goes to committee because authority is measured on the group's total. The analyst's paper recommends approval, and the relationship manager presents. A member turns to the forecast: US$3m of the new money funds capacity for a supermarket's refit programme, and no contract has been signed. The cash cover is adequate without that work only if the line is smaller. The analyst confirms it.

The committee approves on different terms. US$5m is available at once. The remaining US$3m may be drawn only on delivery of a signed supply contract, as a condition precedent to that tranche, within nine months, after which the commitment falls away. The minute records the question and the reason. The borrower sees a facility letter with two tranches. It does not see the discussion, and the bank's next reviewer can read why the structure looks as it does.

Most commercial lending is decided under delegated authority and goes nowhere near a committee: an individual, or a pair of officers acting jointly, approves within a limit tied to exposure and grade. The credit committee is the top of that ladder, not a different kind of decision. The paper and the questions are largely the same; what changes is the number of readers, the calendar and the formality of the record. Some banks have moved more of this into personal authority and use their committees sparingly.

The title can also describe a different body. A board-level credit or risk committee is usually a governance committee: it oversees appetite, the shape of the book and the largest exposures, and may reserve some approvals to itself. The management credit committee in the example above is an operating body that takes deal decisions every week or two. In a smaller bank the two can be closer together.

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The committee reaches back into how a file is built. Analysts write knowing the questions they will face, and a credit paper that buries the main risk in an appendix is the likeliest to come back. A member who has read the appendix and sees the hole has a harder job: the dissent is a skill of its own, and the case file in Issue 10 asks a reader to do it in ninety seconds.

For the borrower, committee means a calendar and an advocate who has to speak for them. A meeting date can set the timetable, so missing information can cost a cycle. The relationship manager's influence lies in the quality of the paper rather than in the room. Anything the borrower wants the committee to weigh has to be in writing before the paper closes. After approval, the minute lives on: at each annual review, and in the hindsight reviews some banks carry out, the reasons are read against what happened.