Can a bank lend outside its credit policy?

Yes, if its own governance allows it and the departure is approved and recorded properly. Lending policies set out the normal case, and a bank may decide that a particular loan merits different treatment. What it should not do is lend outside policy without saying so. Some rules are different in kind: a legal or regulatory limit, such as a prudential cap on large or connected exposures where one applies, is not something an internal exception can relax.

Who approves a policy exception?

Whoever the bank's delegated authority names for that kind of departure. Commonly the approval sits at least one level above what an in-policy loan of the same size would require, and larger or more serious exceptions go to a senior credit officer or a credit committee. The person who originated the loan does not ordinarily approve its exception. Each bank's credit policy sets the matrix, so the level differs from one bank to the next.

How many policy exceptions is too many?

No universal number exists, and a bank sets its own appetite for them, sometimes as a limit. The count matters less than the pattern: how many share the same limit, whether they cluster with one approver or team, whether time-limited ones have closed on schedule, and how those loans have performed against others. A high count on one rule can mean the rule is out of date. It can also mean discipline has slipped. The file review tells the difference.

Will a borrower know if their loan is a policy exception?

Often not in those words, because the term belongs to the bank's internal process. A borrower may see the effects: a longer approval, a higher margin, an added guarantee, a shorter term or a condition to reduce the loan by a date. A relationship manager may explain that a request sits outside a limit, particularly when asking for something to offset it. The credit paper and exception register themselves stay inside the bank.

// WORKED EXAMPLEHOW THE DECISION IS MADE

Policy Exception: How a Bank Approves Outside Policy

Say the rule, say the departure, and say who agreed.

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-09 · 6 MIN READ

// THE SHORT ANSWER

A bank's lending rules assume the file it expects to see, and some good files do not fit. When a bank lends anyway, the record of that decision is a policy exception: the paper states the rule, the amount by which the proposal departs from it, why the bank accepts that, and who approved it. The exception also goes on a register, so that the bank can see what it is doing in aggregate. A single well-argued departure is ordinary credit work. A run of similar departures, or a departure nobody wrote down, is a warning about the book.

BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.

// MAKE THE CALL

Issue 10 — The Dissent. The paper recommends approval. You found the hole. You're the third vote of five — and the RM outranks you. Your call first, then the senior banker's.

Read the file →

PART OF Credit Analysis for Beginners

// 01 — WHAT COUNTS AND WHY A BANK RECORDS IT

A lending policy sets limits a bank has chosen in advance: maximum loan-to-value ratios by asset type, maximum terms, minimum cover, industries it avoids, the covenants it expects to see. The limits exist so that hundreds of separate decisions add up to a book the bank intended. A departure on any of them is an exception, however small and however good the borrower.

The record serves two purposes. It makes the approver's choice explicit at the time, so that nobody signs a limit-breaking loan without knowing it. And it gives the bank data on its own behaviour. Australia's prudential standard requires authorised deposit-taking institutions to have policies on overrides, waivers or exceptions, with clear approval authorities and limits, and requires exposures originated that way to be regularly reported to internal governance bodies and review functions. The international guidelines likewise expect exceptions to policies, procedures and limits to be reported promptly and escalated.

// 02 — HOW AN EXCEPTION IS PROCESSED

Identify the analyst tests the proposal against each limit

State policy says X; this proposal is Y; the gap is Z

Justify why the risk is acceptable on this file

Mitigate what reduces it: structure, security, time limit

Approve at a level commonly above that for an in-policy loan

Follow checked at review; exit date tracked if time-limited

Banks draw the detail differently. Many grade exceptions by seriousness, so a minor departure may need one level up and a sector outside appetite much more. Some also separate underwriting exceptions, which change the risk, from documentation exceptions, such as a valuation still to come, which are about the file's completeness. Australian guidance puts the emphasis on overrides being strictly contained and monitored for how often they occur, why, and how much they matter.

// 03 — THE EXAMPLE

A maker of machine knives for sawmills and packaging lines, constructed for this page like every figure in it, wants to buy its factory for US$5.0m. Its bank's policy, in this example, caps lending against specialised industrial premises at 65 per cent of value, and the borrower asks for US$3.6m. Its cash cover is strong and the owners have put spare cash into new equipment instead of a larger deposit.

Valuation 5.00

Policy limit at 65% 3.25

Loan sought 3.60

LVR 3.60 ÷ 5.00 72.0%

Excess over policy 0.35

Scheduled principal 0.18 a year

After two years 3.24 ÷ 5.00 64.8% (if the value holds)

The analyst's paper states the exception in its first page: a 72 per cent LVR against a 65 per cent limit, US$350,000 over. It gives the case: cover well above the bank's minimum, and an excess that the schedule retires within two years. It adds a mitigant, a guarantee from the owners for the excess, released when the LVR is back within policy on a fresh valuation. An in-policy loan of this size could be signed at one level; because it is an exception, this bank sends it to the next. The approver signs it, and the deal goes on the register with a two-year exit date.

At the quarter's end, the head of credit reads the register. Limits and levels here are the example's and are not offered as norms.

Commercial approvals this quarter 40

With a policy exception 9 22.5%

Of those, LVR on owner-occupied premises 7

Past the agreed exit date 2

Seven of nine are the same limit. Either the 65 per cent no longer fits the way the bank lends to owner-occupiers, or the limit has stopped binding and needs enforcing. Either way the register has asked a question that no single paper could have raised. The two overdue exits are the more urgent item: an exception that was justified by a date is no longer justified once the date has passed.

// 04 — HOW IT DIFFERS FROM A WAIVER OR AN OVERRIDE

An exception of this kind is a matter inside the bank, usually at the point of approval, and the borrower may not hear the term at all. A covenant waiver is a change to the borrower's obligations under a signed contract, given after a test has been or is about to be missed. A bank granting a waiver may need a policy exception too, but they are separate decisions, with separate records and consequences.

An override, in the narrow sense, changes the output of a model, such as a grade from a scorecard. APS 220 uses the words together and describes an override as an exposure approved outside the institution's credit assessment criteria, including where a model's suggested decision is overridden. Elsewhere the terms are used more loosely. A risk grade override and a lending policy exception can both be on one file, and each is recorded for its own reasons.

DEFINED IN ONE PARAGRAPH → · HOW BANKS APPROVE BUSINESS LOANS → · THE CREDIT COMMITTEE →

// 05 — WHERE IT DECIDES A FILE

An exception costs time and asks for senior attention, so it shapes the proposal before it is written. Relationship managers will often restructure to get inside policy where they can, by lowering the loan, shortening the term or taking extra security. Where a departure is real, the file is stronger for saying so plainly. Reviewers discount a paper that hides a breach in an appendix far more than one that names it and argues for it.

It also shapes the borrower's experience. A proposal needing an exception may take longer, may price higher to reflect the risk, and may arrive with conditions tied to the departure, such as the guarantee in the example. A borrower can help by asking early which limit is in the way and what would remove the need, because a bank's most persuasive evidence for an exception is usually a mitigant that the borrower has already offered.

// SOURCES

The documents the statements on this page rest on. Each was opened and checked when cited.

Australian Prudential Regulation Authority, Prudential Standard APS 220 Credit Risk Management, 2022 — paragraphs 57, 58 and footnote 6 — Requires policies, authorities and limits for overrides, waivers or exceptions and regular reporting of exposures originated that way, and defines an override — paragraphs 57 and 58.
Australian Prudential Regulation Authority, Prudential Practice Guide APG 220 Credit Risk Management — Expects overrides to lending policy to be strictly contained and monitored for frequency, reasoning and materiality — sections on controls and internal risk appetite limits.
Basel Committee on Banking Supervision, Consolidated guidelines, CRI10 General credit risk management — paragraph 10.76 — Expects exceptions to policies, procedures and limits to be reported in a timely manner to the appropriate level of management — section 10.76.

// QUESTIONS PEOPLE ASK

Can a bank lend outside its credit policy?: Yes, if its own governance allows it and the departure is approved and recorded properly. Lending policies set out the normal case, and a bank may decide that a particular loan merits different treatment. What it should not do is lend outside policy without saying so. Some rules are different in kind: a legal or regulatory limit, such as a prudential cap on large or connected exposures where one applies, is not something an internal exception can relax.
Who approves a policy exception?: Whoever the bank's delegated authority names for that kind of departure. Commonly the approval sits at least one level above what an in-policy loan of the same size would require, and larger or more serious exceptions go to a senior credit officer or a credit committee. The person who originated the loan does not ordinarily approve its exception. Each bank's credit policy sets the matrix, so the level differs from one bank to the next.
How many policy exceptions is too many?: No universal number exists, and a bank sets its own appetite for them, sometimes as a limit. The count matters less than the pattern: how many share the same limit, whether they cluster with one approver or team, whether time-limited ones have closed on schedule, and how those loans have performed against others. A high count on one rule can mean the rule is out of date. It can also mean discipline has slipped. The file review tells the difference.
Will a borrower know if their loan is a policy exception?: Often not in those words, because the term belongs to the bank's internal process. A borrower may see the effects: a longer approval, a higher margin, an added guarantee, a shorter term or a condition to reduce the loan by a date. A relationship manager may explain that a request sits outside a limit, particularly when asking for something to offset it. The credit paper and exception register themselves stay inside the bank.

// NEXT TO IT

// ON WHOSE DESK

The seats that read this term in an ordinary week. Each page says what the seat is for, who arrives in it, and the shape of the round it runs.

Credit sanctionerHolds delegated authority and signs — or declines — the lending the front line brings.
Credit analystReads a borrower and writes the recommendation a decision-maker will act on.
Portfolio managerOwns the credit on a book after the money is out — reviews, covenants, ratings and early warning.

THE IN-TRAY · ONE MINUTE

Make the call on one file.

A short file on the ground this page covers. Every option opens with how far it sits from a senior banker’s read.

THE CALL · CHAPTER 1

A builders' merchant asks to lift its overdraft from US$1.5m to US$2.5m on the back of sales up 25%. The relationship manager suggests leaving the price where it is, to keep them happy.

What do you ask first?

5 MORE ON CHAPTER 1 · THE THREE QUESTIONS →WHERE DO YOU READ FROM? THE PLACEMENT →

THE READING ROOMIN ONE PARAGRAPHPolicy exception What is a policy exception in a credit approval?