JA FaggThesisV2 PDF

Managing the Credit Risk Attitude
in Australian Retail Banks

across the Business Cycle
Volume 2 (of 2)
Bibliography and Appendices
Jennifer A Fagg
2002
Thesis submitted in partial fulfilment of conditions for award of
PhD at University of Sydney

Managing the Credit Risk Attitude in Australian Retail Banks
across the Business Cycle
Table of Contents
Volume 2 (of 2)
Table of Contents ii
Description Page
Number
Bibliography 1
Appendices
1 Advantages of individual vs. focus group interviews 28
2 Copy of credit rationing literature shown to interviewees 33
3 Copy of interviewee guide for Senior Credit Managers 35
4 Graphical models shown to Senior Credit Managers 37
5 A detailed review of the issues raised by Senior Credit Managers 43
6 Copy of interview guide used for Lending Officers 64
7 Responses sent to each of the Banks after Lending Officer interviews 68
8 Comparison of individual versus focus group interviews in Bank A 95

(summary)
9 Bank A - Detailed Comparison of individual versus focus group 97

interviews
10 Summary of responses from Banks A, B and C (individual and focus 107

group interviews combined)
11 Edited and categorised responses from Each of the Banks showing 110
individual and focus group interviews separately
12 Issues particularly pertinent to individual banks 127
13 Comparison of the notes that were jotted down but not raised in the 129
interviews
Bibliography and Appendices: Table of Contents Page ii

Description Page
Number
14 Data sources for empirical evidence of credit rationing 130
15 Issues emerging from the Senior Credit Manager and Lending Officer 132
interviews (combined)
16 Credit Confidence Survey questionnaire & covering (2) letters 137
17 Credit Confidence Survey report 154
18 Credit Confidence Survey – letter from KPMG regarding authorship 188
Bibliography and Appendices: Table of Contents Page iii

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1 Advantages of Individual vs. Focus Group Interviews
This Appendix provides a summary of the limitations of focus group interviews, advantages of focus
group interviews and advantages of individual interviews.
Limitations of focus group interviews
According to Stewart and Shamdasani (1990), the primary criticism of focus group research has been
based on the perception that it does not yield “hard data” and a concern that it may not be
representative of the population. At a very high level, the disadvantages and potential abuses include:
 Restricted in the area in which they work well. They are not intended to develop consensus, arrive
at an agreed plan, determine the course of action to take
 Information is perceived to be soft, fuzzy, and lacking in focus
 A reliance on small sample size and the potential for questionable sampling procedures
 The group format makes it difficult to research sensitive topics. The confidentiality of sensitive
information cannot be assured
 In an emotionally charged environment, more information of any type is likely to increase the
conflict
 Groups vary considerably, which means that multiple groups must be conducted to balance the
idiosyncracies of the individual groups
 Groups are difficult to assemble with the reluctance of worthwhile, yet vulnerable target
populations. The environment must be conducive to conversation, which is associated with
logistical problems and may require incentives for participants
 Inherent natural vice, where one (or more) participant is incompetent, of bad character, or
intolerable
 Acts of God, which are mainly foibles of panel members, but also include weather, transportation
gliches, accidents, disease , fatality, instrument failure, etc.
 Responses are coded in a simplistic, undifferentiated manner which rarely present more than the
broad categories
 The researcher may place greater credibility on the findings than is warranted, given the “live” and
immediate nature of the data collection
 Summarisation and interpretation of results can be made difficult by the open-ended nature of
responses
 Due to the persuasiveness of the technique, clients who are not knowledgeable may believe they
have witnessed “the truth”and feel they are qualified to judge the meaning and importance of the
data as well as any ordained researcher.
Bibliography and Appendices: Appendix 1 Page 28

 Generalising findings on to a larger population is a potential misuse. Referring to Byers and
Wilcox (1991), the goal of focus groups is to find out why rather than how many’. Generalisability
is also limited by the small numbers of respondents, the convenience nature of most recruiting
practices and the responses are not independent of one another
 Detailed comparison of data across sessions is not appropriate - instead, broad themes should be
examined across sessions. The data are subject to psychosocial factors, but this does not mean that
they are invalid in the traditional sense of construct validity.
One of the major contributions of the focus group format is
“the opportunity to collect rich, experiential information by using group interactions” (Carey,
1994, pg 235).
However, this produces a corresponding weakness as the group itself may influence the data it
produces.
The dynamic group process is affected by personal needs, group chemistry, and the skills of the leader
(Carey, 1994). The interactional effect has positive and negative implications. The negative effect is
associated with the limitation placed on the data of the psychosocial factors. The impact of
psychosocial factors cannot be separated; they are part of the contextual fabric that provides the rich
information.
Carey (1994) argues that the major limitation of the focus group technique is the potential for
censoring and confirming. These occur when a participant adjusts his or her own behaviour as a result
of personal impressions of other group members and his or her own needs and history. When
censoring, a participant withholds potential contributions, often as a result of lack of trust of the group
leader or group members, or the future use of the data. When conforming, a participant tailors his or
her contributions to be in line with perceptions of the group members and or the group leader
The tendency towards consensus is more likely to be a problem when a participant has not yet formed
an opinion and the information in the group session is more likely to affect has or her contributions - a
“bandwagon” effect ( Carey, 1994).
In addition, the results may be biased by the participant effects of (Morgan, 1997; Stewart and
Shamdasani, 1990; Fontana and Frey, 1994): (a) Polarisation ,where participants express more
extreme views than they would in private; and (b) A very dominant or opinionated members.

Further, the results may be biased by the participant-moderator interaction, and the moderator’s
observational skills and reporting skills. Interviewer bias can result if the moderator provides cues
about the types of responses and answers which are desirable and can either skilfully or unwittingly
lead the group into consensus. The bias can be a result of personal bias, the unconsious need to satisfy
the client, or the need for consistency.
Advantages of focus group interviews
Compared to individual interviews, focus groups allow the researcher to observe interaction on a topic.
They:
“provide direct evidence about similarities and differences in the participants’ opinions and
experiences as opposed to reaching such conclusions from post hoc analyses of separate
statements from each interviewee”. (Morgan, pg 10).
Group interviews offer the key advantages of:

 A rich body of data expressed in the respondents own words and context. A major assumption is
that the permissive atmosphere fosters a range of opinions leading to more complex and revealing
issues through different perceptions and points of view. Pressure is not placed on participants to
vote, plan, or reach consensus. Focus groups can assist in explaining how and why people behave
as they do, and provide the means to probe people’s emotional reactions to issues
 Obtaining in a condensed way the range of different voices. The differences and similarities
between the different participants are made directly visible, as are the dynamics between the
perspectives on a problem
 Focus groups are argued to possess the capacity to become more than the sum of their participants,
to exhibit a synergy that individuals alone cannot achieve (Krueger, 1994).
 Encouraging self-disclosure. People have a high propensity for self-disclosure when the
environment is nonjudgemental and permissive
 New opinions may be formed or present convictions may be strengthened by the open exchange of
different perceptions. The group format also can aid recall
 There is direct interaction between respondents and the interviewer, which provides opportunities
for the clarification of responses, follow-up questions, probing of responses and the observation of
non-verbal responses to supplement verbal responses
 Comparatively inexpensive

 May be adapted to provide the optimal level of focus and structure
 The discussions have high face validity
 Speedy results can be attained. Focus groups offer utility. Although it is time consuming to
develop the interview guide, etc, preparation time is less than that for a survey tool or an
observation instrument, for example, and there is a quick turnaround time in data collection
 The sample size can be increased, within time and cost constraints of individual interviewing
 Being able to address both fairly complex problems and simple issues
 Being able to be conducted with a wide variety of individuals in a wide variety of settings
 Data can be obtained from children or individuals who are not particularly literate
 Results are easy to understand; more sophisticated survey research with complex statistical
analyses are not always easy to understand
 Stimulating to respondents.
Advantages of individual interviews
Individual interviews offer advantages in terms of (Morgan, 1997; Krueger et al):

 Greater control over the interview. The interviewer can use more cues to control the one-to-one
discussion and the dynamics of the interview may put more pressure on the participants to
elaborate initial statements with little prompting from the interviewer. The counterargument is
that focus group interviews make it easier to conduct less structured interviews, with the group
controlling the direction of the interview
 The researcher has more control as participants can influence and interact with each other and
hence influence the course of the discussion
 The greater amount of information the participant shares. A 90 minute session with eight to ten
participants means that participants only have around a tenth of the time to provide verbal
information than they would in an individual interview. Individual interviews also facilitate a
continuity and completeness of narrative
 The researcher’s heightened visibility in conducting the interview makes the interviewer’s
influence in focus groups more prominent. In the individual interview, the interviewer is removed
from many accounts.
Will individual and focus group interviews produce different results?
An important issue is whether group and individual interviews will produce different results (with the
assumption being that one of them therefore must be wrong). If people do act differently in groups,
then the different interview styles will reflect the different aspects of the overall behaviour patterns.
Morgan (1997) highlights that most topics do not fall neatly into purely individual or purely group

behaviour. The question of which approach to use in different circumstances is largely empirical -
more research using both techniques could provide the answer as to when to use individual or group
interviews, or a judicious combination of the two. Morgan argues:
“Sadly, with only one or two studies that provide thorough comparisons of individual and group
interviews, it is hard to say much about when such differences in context might lead to
differences in results” pg 13.
Fern (1982, quoted in Morgan) used a controlled experiment to analyse individual interviews and
focus groups, and did not find that group interviews produced significantly better or more ideas than
an equivalent number of individual interviews. However, Fern did find efficiency in that two eight
person focus groups provided as many ideas as ten individual interviews.

2 Copy of Credit Rationing Literature Shown to Interviewees
This Appendix provides a copy of the summary of the credit rationing literature used in the Senior
Credit Manager interviews.
Credit rationing occurs when financial institutions (“FIs”) do not provide the level of debt required by
consumers. This can occur when:
The FI does not approve an application for a loan made by a potential borrower
The FI does approve an application for a loan but offers the borrower a lower amount of money
than they request
The potential borrower is discouraged from applying for a loan because they do not expect that
the FI will approve their loan application.
In a world of perfectly competitive markets, there would be no artificial rationing of credit. Price, in
the form of interest rate charged to the individual borrower, would simply determine the quantity of
credit to be provided. The rate a borrower would be charged would vary by the risk of default – a
spread/premium would be applied to the base rate (which is equivalent to a loan where there is no
possibility of default) to reflect the probability that the borrower would default on his/her payments.
Note: The risk on the loan could also be affected by the existence of collateral.
However, an underlying assumption of this argument is that it is possible to identify the risk of default
for each individual borrower. In reality, the lending environment is highly complex, and cannot be
easily reduced to a price and demand equation. Debt involves the promise of the consumer to make
repayments according to an agreed schedule sometime in the future. The borrower’s propensity and
ability to make repayments over a period of time is uncertain, and no two borrowers will be the same.
This is complicated by incomplete contracts, imperfect and asymmetric information and uncertainty.
The theory of credit rationing provides a model to examine these factors. It has been developed
primarily in the context of commercial markets, but it has been argued that the theory can be
transferred to the retail market. The theory posits that credit rationing can occur through:
Price rationing, where price in the form of interest rate charged is increased to reflect the
increased risk premium
Disequilibrium quantity rationing, where FIs are artificially prevented from offering loans at the
price to clear the market due to factors such as government regulations
Equilibrium credit rationing, where lenders choose not to offer the interest rate and loan
conditions which would clear the market.
Equilibrium credit rationing is the primary focus. It occurs when lenders do not believe that the
lessening of the quality of the portfolio and the resulting credit losses and costs of remedial
management will exceed the income the FI will make from charging the higher interest rate and fees
associated with the higher risk loans. The loans will be of higher risk as a result of adverse selection
(or hidden information, where only higher risk applicants will be prepared to pay the higher interest
rates) and moral hazard (or hidden action, where existing borrowers have an incentive to undertake
riskier projects with higher potential returns as they have to offset the higher interest rates).
The theory of credit rationing has focussed primarily on the behaviour of the consumer in affecting
default risk. This study will attempt to extend this, to include the effect of the “credit risk attitude” of
FIs – the propensity of FIs to accept riskier borrowers. The credit risk attitude will vary over time, as
a result of factors such as competitive pressure to grow market share, and the knowledge and
experience of credit specialists in the organization.

In addition, this study will incorporate the effect of economic risk by incorporating the phase of the
economic cycle, from periods of growth to recession. Note: Industry risk (the industry in which the
small business operates or the wage earner is employed) will not be specifically addressed, primarily
as there is minimal publicly accessible data.
Generally, the analysis of credit rationing is made complex by the difficulty in collecting the empirical
data to support the theoretical model. In Australia, there is not systematic collection of the level of
approvals/declinals of loan applicants, nor the proportion of loan applicants who are offered a lower
loan amount than was initially requested. Neither has the data been collected on the potential
borrowers who are discouraged from applying for a loan because they do not expect the FIs will
approve their loan application.
It is possible to compare information aggregated across the economy on the level of defaults/
bankruptcies, in the context of a benchmark home lending rate and economic indicators such as
unemployment and inflation. However, the impact on individual consumer behaviour can be inferred
only. This is seriously affected by a number of issues, such as the impact of non-price features on the
attractiveness of the “average” interest rate, and the inability to segment the data into sub-groups.
The purpose of this exercise is to supplement the quantitative data that is available through interviews
with a number of credit experts in Australia, by obtaining anecdotal data on the interaction over the
last twenty years of:
Consumer demand for debt

The FIs’ credit risk attitude
The interest rates charged
The phase in the credit cycle and the economic cycle.
The following charts are intended as prompts for the interviews.

3 Copy of Interviewee Guide for Senior Credit Managers
This Appendix provides a copy of the Interview Guide which acted as a base for the Senior Credit
Manager interviews.
EVIDENCE OF IMPRUDENT LENDING
Are there examples of imprudent lending due to excess funding, wanting market share and hence using
inappropriate credit criteria? If so, when and what?
Is there evidence of reduced credit quality now – Cards, personal loans, consumer mortgage, motor
vehicle, small scale commercial/ small business? If so, why? Is this worse than prior periods? That
is, is there evidence of volume lending (volume for volume’s sake)? Have you seen cedit lending
excesses associated with push for market share in the past cycles?
Is there a mix of prudential lenders versus lenders of last resort? Has this changed in proportion to
what has occurred at other times?
If lenders are prudential, why? What motivates this and why are some more so than others? That is,
why are some prudential across the cycle and not others?
By what mechanisms is credit quality decreased? That is, which tends to happen more - based on
lending criteria and loosen credit policies formally or leave credit policies tight and have more
exceptions (or people simply ignore credit policies)?
Is there pricing for risk and sufficient loss provisions? Has this happened (eg. in commercial lending,
100bp above cost of funds does not leave much room for credit losses)?
What are the good and bad credit policies that spring to mind?
How did the policies originate? What was the catalyst? How was the policy developed? What was
attractive about the policy at the time? Did it work?
Examples of bad experiences …?
What changes would you like to see in credit risk management? What would you like to be
preserved?
What advice would you give someone entering a job like yours? What lessons have you learnt that
spring to mind?
Is the current level of lending imprudent? If imprudent, is this similar to prior cycles eg. corporate,
motor vehicles in the late 1980s?
What is the effect of decentralisation on credit quality?
How should we work out a measure of competitiveness – to track interest spreads and fees as well as
other forms of non-price competition?

LEGISLATION / CONSUMERISM
What effect has legislation had on credit quality?
Do you see a high level of delinquency?
Do you see a high level of bankruptcy? If so, why is there such a high level of bankruptcy
(particularly given delinquency is not as high in the industry)?
If people’s attitudes to Bankruptcy has changed, as it now appears “easy”, will it change back when
borrowers find it inhibits their lending going forward?
Will there a fundamental shift in the credit cycle due to:

 Consumerism, with legislation favouring consumers?
 Consumerism, with consumers simply being more knowledgeable of their rights along with
bank-bashing?
 Consumers more prepared to go into Bankruptcy?
 Consumers more cautious, due to the lingering memory of the recession?
Are there some people who are “bad” – that is, have no intention to pay – or are there simply “lucky”
and “unlucky” borrowers?
Disaster myopia could also be affected by regulatory freedom – with deregulation and increasing
consumerism in legislation, what is the effect?
LEVEL OF DEBT/SAVING
Debt as a % of income has been quoted as increasing dramatically. What are the reasons for this? For
example: Increased cost of living, so there is no choice;; peoples’ attitudes to debt have changed and
they are simply prepared to live with a higher level of debt?
Is the level of debt a concern – that is, will it blow up or are we simply going to live with a higher
level of debt?
Do people actively pursue a life cycle saving plan? Do they smooth consumption according to
information such as consumer confidence indicators or GDP movements (eg. if going into the good
times, will consciously spend more)? Or do most people act in an unsophisticated way and simply
spend everything in their pocket?

4 Graphical Models Shown to Senior Credit Managers
This Appendix provides a copy of the graphs and model of the credit risk attitude shown to
interviewees.

5 A Detailed Review of the Issues Raised by Senior Credit Managers
This Appendix provides a more detailed reporting of the issues raised by Senior Credit Managers than
provided in the Chapter: Units of Research .
Is there pricing for risk?
The common theme has been that, instead of pricing for risk, FIs’ pricing is driven by the desire for
volume in a competitive market which is “awash with liquidity”.
 “We aren’t pricing for risk. We all are just pricing and negotiating for market share. Trying to
pick quality. Okay, I’ll back the people and hope nothing will go wrong over here ... There is that
sort of competition out there. Does not help you do what the text book says you should do”
 “If you are pricing for credit risk correctly and operating within that, then you will have no
problem… The difficulty is that no lending institution tends to do that. They tend to run with the
pack. They look for balance sheet growth rather than consistency”
 As a group of Australian lenders, FIs are not aggressive in pricing for risk – it is obtained as a
product with standard pricing. At the top end of the market, there may be a bit of special pricing.
“There doesn’t seem to be a demand for it, funny enough”.
 “Organisations do not maintain consistent credit policies purely due to balance sheet growth. If
you want to grow the balance sheet, and economy only growing by 4% per annum, the only place
you can get your balance sheet growth is by taking other people’s share. The only way to take
other people’ share is to price competitively or lower your credit standards or both. And that’s
what we are seeing … As the availability of funds to lend increases and competitiveness increases,
the pressure on credit gives.. They lost the credit culture”
 Competition “forces our hand. If we want to be in it, we have to compete”
 An interviewee argues that it is very hard in this competitive market to price for risk, where
competitors aren’t factoring in pricing for risk. “You can’t tell everybody to go to the competitors
– you have got to compete in the market to some degree”. As a market group, FIs don’t price well
– they price to the bottom level of the potential pricing range. “An element of maintaining a
position in the market and a time you walk away”.
 “Market forces determines what your pricing is. Everyone understands pricing for risk. But
market forces drive where you end up in the end” “The market has driven margin down and you
cannot price for risk anymore .. we are not getting the right around of margin for risk”
 “It is a market forces issue, other than pricing theory, which affects everything we do”.

FIs do not price for risk as:
 “What happens in home loans in Australia is that rate for risk return is thrown out the window by a
thing called Mortgage Insurance. Mortgage Insurance compensates lenders for doing a higher risk
loan” (LVR greater than 90% higher risk than LVR of 50%). “The risk of loss is transferred. So,
what we have is the transference of risk through that pricing mechanism”.
 Over the 25 to 30 years of a typical home loan, circumstances of customers can change either to
their advantage or disadvantage. It is argued that credit scoring works only over a five year time
frame. Hence, there needs to be some other form of assessment used and the credit rationing
argument does not work
 “However you cannot price risk all the way through because of the issues such as the uniform
credit code”
 “Think some of (credit price) is inelastic – people do not behave on the basis of price on what
they take on. They behave on the basic of convenience and prestige and reward points. And
therefore that distorts the price elasticity”
 With the interest rates for secured products, the premia are too small to show in interest rates. In
unsecured products, there have been no price wars or movement
 FIs don’t want to charge a really high rate because people will go under. There is a level of debt
which is socially optimal. Most people live well when credit is free
 “Rewards systems clouds the pricing issue”
 “Can argue that at the lower cutoffs, you can have a differential interest rate. That becomes
extremely difficult to manage and prociess because how do you market it? If you are doing
volume applications via direct access an phone how do you deliver what the interest rate will be to
the customer when they query? And the current design of the letters of offer under the consumer
credit code make it extremely difficult to do so. You have the letter of offer situation, you are
talking to the customer and saying “Oh well, what can you afford” and go through the assessment
and then you might be changing the interest rate on them. You can’t do that”
 “If apply price rationing theory, ignoring mortgage insurance, because of capital cost, we have a
major issue of selling into the market place. And no lender does that at this stage. Secondly, if
you look at people at high LVR ratios, they are the people who can least afford the higher interest
rates”.
 There is a perception that there has been cross-subsidisation, with overpricing of other products to
compensate for underpriced home loans and get an overall return on the total portfolio. “Makes
credit rationing not happen … We can make a premium on that product to compensate for the non-
return we’re making on this side”. It opens the door for competitors for cherry picking – which
has been seen in home loans and is expected next in Cards

 With the continuing credit contract, the customer may be acceptable now, but they may run into
trouble in the future. When they are in trouble, “do you increase the interest rate (but run into
consumer credit code and normal law of contract issues) and secondly does it overcome the
problem you face? It does not. I do not see that that theory can work in a practical sense to any
great degree”.
Differential pricing is demonstrated through “relationship pricing”:

 On business loans, not residential secured (standard interest rate)
 For customers who have been customers with one of the FIs for greater than five years.
There has been a desire to increase non-price competition:

 “Would like to find good avenues for non-price competition. The ability to compete strongly on
price is relatively narrow. So you have to have a proposition where you will compete strongly on
service or other types of things. It is actually quite hard to do .. We’d like to, we’re trying hard to,
but you’re ability to sustain competitive advantage is actually quite difficult” ANZ
The pricing / credit cost calculation should incorporate the tangible and intangible cost of collections:
 “We have grown up with a view that a bad debt is a bad debt and there’s no good price for a bad
debt”. It was argued that the FI was a prime institution which should not be dealing in that end of
the market. “Chasing up and collecting money is an expensive thing. Time spent in fiddling
around with a nuisance is time spent not being out in the market place talking to your good
people.”
 It is argued that reducing cutoff score may lead to less level of return. This may be acceptable, on
average, because it is not costing the FI any more to get the loan, because the costs of marketing,
management , etc, have already been incurred. However, it is necessary to factor in the cost of
collections and adverse publicity and moral obligation of lender. “So, may appear profitable at the
lower cutoffs, it is not worth doing because of all the situations that apply”.
Terms and conditions as well as pricing are being relaxed (such as covenants and loan-to-security
ratios).
The basics don’t change

There is a widely held perception that the basics don’t change. However, the Banks have exerted
considerable resources to improving their management of risk:
 “There really has been a strong effort to manage risk better. And that manifests itself in a number

of ways. Policies were adjusted. Conscious effort to increase skills in managing credit.
Authorities were reduced. In a number of ways – organisationally, functionally, processes,
procedures, commitment of resources at board level ot manage these things better, different
reporting lines”. The effect has been vertically through all portfolios – corporate to small
businesses with more common themes. However, “The “Cs” never change. How
(organisationally, systems, skills, staff) respond to it does not change much. You could commit
resources to continuing to grow the business, or you could commit that degree of management
effort, resources and capital to managing risk better. They both have certain outcomes – choice of
best return.”
 Having been through the cycles of the 1960, 1974, 1984, and the late 80’s “Organisationally, the
response to them has only been marked in the last one”. The previous ones, if there was more of a
rationing type thing the effect was not perceptible. This time … “We did not respond by rationing
credit, but by trying to manage risk better. And that manifests itself in a variety of ways. The end
result of that, in trying to manage risk better, the end effect is some type of rationing because
lower risk credits probably have found it more difficult to get access to credit as a result of how
we’ve tried to deal with the better managers of risk”.
There is a common perception that policies have not actually changed dramatically:
 “In terms of policy, was more trying to increase skills and trying to tidy up our organisation
response to it”. There has not been an enormous change in policies, but restrictions have been put
on credit authorities and escalations on the risky types of business.
 “traditional lending policies still there. Very subjective in terms of credit assessment” That is, the
decreased credit standards have been affected more through the interpretation of policies has
changed rather than changed policies.
There has been a significant effect on the marginal cases:

 There has been a change in the proportion of marginal customers which were acceptable but only
marginally so. Thus, there has not been a change in standards, but just a move in the low end of
the score
 “I don’t think we actually tightened up .. The effect of a number of changes were to see poor
credits rationed – in a sense a degree of tightening up… Worthwhile businesses with an average
case to sell, did not experience any difficulty in getting credit. At the margin”. The objective was
trying to recognise the type of projects that do have more risk in them and setting tighter standards
for those types of industries. “Individual cases within highly risky industries were still able to get
credit … strength on underlying proposition but it meant the more marginal ones found it more
difficult to get credit”

 “Housing more affordable leading to more applicants on the margin leading to more high LVR
therefore more get through”.
Whilst formal policies may not change, the underlying message that the focus on credit has changed is
conveyed:
 “Policies not changed, but subliminal message has” in terms of easing lending standards
 What perhaps happens is the power emphasis. In a recovery situation from the Managing Director
down, there was a lot of emphasis on recoveries, provisioning levels, putting in place management
systems. Indirectly, that directs general managements’ attention, that would say we are not
focusing on selling. “We don’t do it consciously. We tend to do it by way of saying
managements’ emphasis is pushed one way. Anecdotally, credit officers who can approve credit
probably feel more powerful in that situation. Less intimidated by the line”. Thus, indirectly,
credit is rationalised, as the Bank is tighter and stronger in its decisions. The interviewee does not
report any direct evidence of underwriting standards being changed.
Exceptions management is important:

 “Policies can’t be broad enough for every deal (the one-offs which are really good quality,
regardless)”. There should be a process to allow the deals to be written anyway if they are good.
FIs have been evolving from the Managing Director / Chief Executive Officer level:
 “MD / Bank evolving over time – don’t like taking losses and has come down from there”
 “You have to be a change agent these days, and look at better ways to do business”, with the
message coming from the CEO .
The “power” of credit

Interviewees take a pragmatic view of the relative “power” of credit across the cycle, in terms of the
risk / reward tradeoff.. The periods of high visibility of credit losses afford the credit risk managers
opportunities to obtain focused resource on the credit risk infrastructure:
 “Basically focuses the management of credit on the process cycle … Head of credit had the
opportunity to focus management’s attention on credit. Could tighten up prudential policies,
implement objective risk grading systems. Credit tends to take that opportunity to push through
change. Which isn’t rationalising credit, it is in fact improving the credit process”
 “Organisationally, much stronger case to invest in managing risk”. In the early eighties,
organisationally, we did not commit enough resources to mange this very important function to the
degree it should have got. So when the loss piled out we struggled to respond to that.

Obviously, there was never a better time to get an allocation of capital and resources and effort”
 All the changes, plus legislative changes, “have been pushed through because credit had the power
to do it and the momentum to do it. We had that window of opportunity.” You get that window of
opportunity – if you don’t grab it when its there then you aren’t getting better. The last one they
had, they took the opportunity, if only establishing a framework of portfolio management,
dynamic provisioning, scoring, specialised unit, automated processing systems, segregation of
duties, etc.
 Living through the big losses puts the focus on credit. Why not continue throughout: The
memory is there, but nobody listens or asks.
However, periods of high visibility of credit losses damages the credit image.
 “Downside of credit losses is that credit loses credibility. Management there are at the time is
blamed, so their corporate memory is discounted (even if they still are there). Commonsense tells
you, as a banker, … part of my role is to get credit’s credibility back”
 With regards to the possibility of frauds with electronic banking: “Even if we foresaw it, not sure
we can do much about it”. Henny Penny - the sky is going to fall in. “Its not good being a henny
penny when everyone else is saying it is okay. Challenge is trying to predict where the next
problem will be”.
Lending practices across this cycle

The factors which appeared particularly pertinent to this credit cycle are outlined in this Section.
The impact of deregulation has been commented on:
 “Deregulation undoubtedly was heavily at the table of what happened in the late eighties .
Deregulation lifted off the constraints of capital and the supply / demand thing which had shielded
banks all through the history in Australia prior to that”. With competition and other things it had a
front row seat in what happened.
A commonly highlighted issue has been the effect of the “massive credit losses they were taking” in
the early 1990s, which threatened to close the business down. Shareholders were not getting return on
their money:
 Problem loans triggered it, and then to survive the FI had to cut costs, and to be a competitor in the
retail market, we are just selling commodities. There is no allegiance to the bank – really it is just
price. Hence we have to be the lowest cost competitor. “You change the way you lend money”
 “Having just gone through the economic recession we went through. Came out of that and a

change in the culture. Changed the structure.”
One interviewee comments that the most recent cycle was markedly different from prior cycles.
 Prior cycles were not nearly as intense with regards to actual losses and effects on profits and
capital (the cycles of the 1960, 1974, 1984, and the late 80’s). “Organisationally, the response to
them has only been marked in the last one”. …“Undoubtedly because the last cycle was so
devastating in terms of losses. Organisationally, we had to respond positively to it… We were
fighting for survival” due to loss of (nearly all our capital). It was a a worldwide cycle. “The prior
cycles were Australia only, and even within Australia, it particularly hit property speculators.”
There were flow ons to other industries, but the core of business was not very much affected. The
last economic cycle was much more persuasive in what it affected in Australia.
Amongst the Banks interviewed, there is a common perception that “its everyone else”. The other
“Top Nine” banks have been “busily lowering credit standards to write volumes”. None of the Banks
reported themselves as having lowered standards!
 The Majors have forgotten the basics already.” “For the large most complicated exposures, I
actually go out there and have a look myself … we go out there and kick the tyres. … but the Big
Four Bank have said you are not allowed to have anything to do with the client”.
 Big Four and some of the regionals are lowering standards – volume for volume’s sake – but not
us
 “Everyone’s loosening up for competition, but here we are trying to be prudent”
 “As avenues for profitable business get harder to find, it may be the need for take on higher risk to
take on the appetite for writing more assets. It certainly won’t come from this bank. Our
commitment to strengthening credit and risk management now is that deeply engrained that it
would really take a top management turnaround to change that across all our organisation – the
commitment to portfolio management, underlying systems, even the seniority of the appointment
of the chief credit officer – all those things. Credit was not empowered previously the way it is
now. In our bank at least, we won’t become a fringe lender”
 “Banks are doing business now which in the mid 80 s would have been finance company
business… We have to be careful that we have to price for that”
There is not common perception as to the effect or extent of the of the “lenders of last resort” on the
industry.
 “More prudent lenders have stabilised the industry, although there still are lenders of last resort out
there (the small ones whose names you don’t know) who would be pricing for risk”
 There was a perception that there probably were more lenders of last resort now. In an

environment where interests rates start to go up, the true impact of what these people have been
doing will become obvious. “very active … with people in the lower end of the socio-economic
system.” encouraging people to commit themselves to a level they can’t afford when interest rates
go up to 11 or 12%. The interviewee queried whether they have the infrastructure properly sorted
out, with sufficiently experienced people to handle any problem loans. Originators portfolios are
securitised - just hand back the default loans
 There was a perception that, if anything, there probably are less lenders of last resort. In the
downmarket, they would have had to collect their money and run or they would have been run out.
“Still a couple of lenders who are unable to assess risk as well as others and they are taking on
things we are trying to shed. They may know more than we do – but there still is a tiered risk
taking approach in the market. Don’t know that they’re pricing it any differently, they just have a
different perception of what the credit exposure is”
 The industry does not have the Tricontinentals or Pyramids around. “I don’t know where the next
generation of high risk lenders will come from – maybe the regional banks”
 “ ‘Benchmark rate’ – add a couple of percent on top of where current interest rate is. Have heard
that people like the originators are not acting like this”
The stage in the credit cycle in terms of the credit risk model, at the time of the interviews in fourth
quarter 1996, has been given as:
 Arrogance / disaster myopia (on the credit risk model)
 “Writing volume for volume’ sake … I have never seen it work. Because credit is a cycle. The
wheel will turn again. Very nice to know when…”
 Credit standards in the market generally have lowered, due to the pressure to write business
 “If you have the capability and you can prove your ability to meet your obligations under a loan
you can get a loan very, very easily today … There are people trying to re-create the excesses
again”
 “We’re at the point where there is potential for people to get in strife”. The FI has put in systems
now to manage the risk, being much more selective, But, overall, there is a much more aggressive
level with more players in the market (eg credit unions, regional banks expanding into other
regions, finance companies). … On average, there is the feeling that the policy side is tighter.
Everyone has policies written now – before people just knew what they were. Most people have
centralised their operations which means policy much more likely to be adhered to
 They are loosening policies, six years later. Firstly, disaster myopia is setting in, and secondly,
other lenders who have not gone through the cycle and all the risk is transferred (mortgage
insurance) anyway. Mortgage insurers are in disaster myopia and overreacting when it looks like
the worst is over anyway

 Financial institutions weren’t as cashed up as they are today. They were starting to look at the
problem loans – just look at the capital requirements. We are awash with liquidity now.
Interviewees reported very limited organisational learning with regards to the credit cycle:
 “Every credit cycle we do the same thing and we are going up the ladder”
 “We have short memories”
 The key is the management controls and the longetivity of people. It does not take long in a five
year cycle for the people who were involved to have gone. There has to be a focus on training up
new people. The FI should not perpetuate what you might have seen. There were signficant
improvements in how to recover money. … “we got smarter at getting money back”. The FI has
much better at investigative accounts, which has helped the experience level
Another interviewee focuses on the importance of experienced credit managers:

 “Trying to bring the experiences you have gone through, having gone through probably the worst
economic cycle since the depression of the thirties. Use that as a very recent example of why we
should be doing things better and not falling back. My own personal view is that within twenty
years we will have forgotten what happened in the early nineties. Probably less. There are still a
few of us around who will stop it happening. And the reason I say twenty years is that people who
are in their late 30s early 40s will be gone out of the industry by then”… “You can still be in the
situation where you worked at the time the recoveries come. But if you weren’t actually having to
recover the money you don’t experiencing it” “We experienced the heartache, the anguish, the
people committing suicide, all those things .. and we don’t forgot those sort of things easily.
Whereas once we go, that’s when the cycle will turn itself again” … “It is up to us who went
through the experience”.
Throughout this last business cycle, there has been a fundamental change to “the way we do business”
in credit with the transition to a portfolio-based approach from a traditional transactional model:
 The Bank has been developing policies and procedures in a Product Program format, writing key
performance indicators for sales and marketing profitability and credit risk management for each
product, and setting monthly monitoring. However, (the interviewee reports) that it has been lip
service, and they have to make it part of the culture
 One interviewee comments that they have looked to the United States’ model. “We tried to take a
little piece of everything we saw and put it into an amalgam … it doesn’t work like that” Now in
process of doing some refinement, with one of the challenges being just understanding the
productivity cost – “you need to spend a lot of money on credit, but what is the right amount to
spend?”

 “Sometimes we in credit have got to look after the bank against itself as well … If you apply a
credit culture to everything you do .. its just risk reward .. you have to recognise what the level of
risk is and you plan for it”.
Mortgage insurance has been sited by a number of interviewees as changing the dynamics of the
secured lending process:
 One interviewee reports that Mortgage insurers change the attitude of branch staff, in that they will
get the approval from the Mortgage Insurer and tell the central credit area that they already have
approval. The Branch staff seem to think it is a safety net, when really there would be costs
 “The willingness of mortgage insurers to go to 95% and the market out there certainly enables
them to write a lot more loans”.
The possibility of mortgage insurers coming under pressure from a “run” on insurance claims also has
been raised:
 From a mortgage insurance point of view, three things must happen concurrently in a recessionary
period: High interest rates, unemployment and downturn in property stock. They only occur rarely
– get two out of three every, say, seven years and only get all three every, say, ten to twenty years
 “If economy every went into freefall, and properties off 30%, what impact on Mortgage Insurers to
meet repayment claims?”
Banking credit operations

There have been variable responses as to whether the decentralisation of operations had an effect on
the management of credit standards. A representative from a Bank which had decentralised operations
states:
 “Decentralisation is more difficult for top management to manage. In theory, with best systems
and process its eminently manageable. But, without that strong core ethic and disciplined culture
… it created the opportunity … The difficulty for top management to respond to the situation and
get consistent and committed responses to manage things the way it should have been is more
difficult … Unfortunate we decentralised to the extent we did over the period … A lot of
organisation distraction in managing decentralisation. in way we do business ..new people in new
roles, with organisation trying to have a strong marketing / sales focus .. very much part of
decentralisation is - here are your resources, you just go and manage it, you just go and do it” . In
addition, the increase in people’s authorities was immense
However, a contradictory view is provided by another (relatively centralised) FI:

 “You can decentralise as long as you make sure you have a rigorous program of making sure that
people are behave in line with their discretions and the policies are being adhered to”. There
should be caps on credit authorities, and escalation if an application involves an exception or a
bigger loan amount. Credit authorities should be subject to ongoing appraisal and inspection.
Decentralised residential home loan approvals and did not see a deterioration. “Decentralisation is
not the issue – it is how you manage it that matters”
It is argued that the centralisation / decentralisation cycle will happen again:

 The winds of change are occurring again – decentralisation is occurring again. “If you see enough
cycles, you see great desires of organisations to rebuild themselves in previous ways”
The need for increased controls was highlighted by a number of interviewees:

 One interviewee reports that, due to pressure on sales’ staff time, their managers don’t want them
to do annual reviews. However, the abolition of annual reviews was not offset by other controls
 The need to establish controls to prevent collusion with valuers is sited by one interviewee
 The separation of credit functions, with salesforce being a separate unit and using brokers leads to
a culture change and means you have to change the way you do business. “Have to be good at the
front end, and on to people in Collections. Fraud is an issue.”
The need to have capable credit staff, with a broad base of skills, has been highlighted. It also is
emphasised that the traditional form of training – with staff working their way up through the Branch
system – no longer applies:
 “A reasonably young team. In the old days, came through the Branches”.
 It was reported that there was hardly any external training courses in credit .. The training was
more about advanced training for very experienced people – risk models, managing bank credit
and macro-economic influences, and not about core credit. “So some of the traditional credit
training won’t be an option… We will need to train for quite different skills in the future”
 “Its good to have both marketing and credit administration when in a credit role”
 “You can train people, but you can’t train them in common sense. Street wise and common sense
you don’t learn that .. it develops. Sometimes people just haven’t got it. They are just too
trusting”.
Interviewees report significant improvements in their ability to manage credit risk. A focus on cost
cutting also is evident:

 “We have improved processes and underwriting standards to combat the change in the sales
culture and the different organisational structure. Change in the organisational structure due to
cost focus”
 It has been reported that better application systems and better scorecards have been a struggle to
get through. It is very difficult to get the budget to achieve the benefit. Most of corporate
strategies and plans on cost cutting through centralised processing, etc .
 For credit cards: “With the use of scorecard, the technology, the know-how, the skills are there to
manage it better. At least you know what kind of risk you are taking on and you have got the
ability to say we will turn it up or turn it down. It really is a management decision. There will be
a risk / reward tradeoff. You are either going to make money with this degree of risk appetite or
you are not”
 “Credit scoring system if they are build correctly also control economic cycle. Because the nature
of the applicants tends to deteriorate as the cycle deteriorates and therefore you get a higher reject
level”
 It is highlighted that more science / technology means that credit risk managers know more about
portfolio analysis and have the capacity to get stable information through tools.
A dissenting opinion on the impact of new methodologies has been made by one of the Regional
banks (where less work had been conducted on improving the decision support systems):
 Credit standards loosened but offset by risk assessment tools? Can still have technology, but if
you do not lend badly in the first place… The problem “is that moving the credit off the books is
almost impossible when they are going bad. Whereas with equities and investment theory we have
the opportunity to bail out of the exposure by on-selling it in the market … Increasing the interest
rate doesn’t help, because the customer can’t service the debt already. All you are doing is
increasing your loss”.
The need to re-evaluate the borrower over time has been raised:
 An interviewee highlights the problem with household disposable income – what is a reasonable
level that people need to sustain their lifecycle? It is a problem in assessing the capacity to pay
(credit worthiness) but the capacity to service debt changes over time. This is heightened as there
are more lifecycle products which stay with customers throughout duration of the lending
(continuing nature contracts). “We need to assess them on an ongoing basis – move to behaviour
scoring and customer scoring”.
It has been highlighted that the new way of sourcing business, through Branches and Brokers,
provides a new set of management issues:

 There is a perception amongst sales staff that brokers referrals’ have to be accepted, otherwise they
will never bring any more loans to the FI
 “They are not measured on the basis of the branch profit, but the volume of loans written. Driven
so much by volume performance, without the balance out there. Reasonably large deals, we get
the balance in here”.
The need to work with marketing and the line unit has been raised:
 “I would like to think that we could work better with the line unit – don’t know if it ever will
happen. If it does not, we will have to take over more responsibilities. If product programs don’t
work, in terms of KPIs (key performance indicators), monitoring of portfolios, roles and
responsibilities, ie if people don’t do what I expect them to do, then I have to say that my
framework is not working. If my framework is not working, then I have to change it. He will
manage across business cycles – so have to put in something that works. If they don’t do what
they are meant to, then it is not working. “Generally, pick it when it is your time”.
It is reported that there has been a challenge with the move to “business ownership” of credit:
 “People who are supposed to own the products, are really more marketers and advertising. They
really do not understand the whole perspective of managing the portfolio. Through from the
approval, maintenance of a loan”
After-sales service also has been raised as an issue:

 “after-sales service is not looked after properly ... Everything is centralised, and ownership of
customers has broken down”.
Credit authorities also have been raised as a priority: “Its an ego thing”
The need for consistency is emphasised:

 “Competition is driving people to write deals – they go from one part of the organisation to the
next part to get approved”
Consumerism and legislation

The reporting on the impact of legislative changes has been mixed:
 One interviewee comments that credit legislation has had much impact on credit – did on the
documentation side

 “I don’t know if it will affect the credit cycle. It probably is going to be more restrictive to
consumers to get more access to credit. Consumer groups will see that some segments are
disadvantaged (costs, inflexibility, restrictions) which people don’t want. Organisations will have
to re-price transactions to reflect higher costs”
 “Do not think new consumer code will have a major effect, unless they were not covered by the
credit act previously (for example, credit unions)”.
Interviewees responses to the effect of consumerism have been varied:

 People are more aware of the credit act and what credit providers can do to them … “if you can
defeat your banker, you are a hero”
 “Consumerism – laws changed, all weighted toward the consumer”
 An interviewee reports that the new Consumer legislation has not changed the approach that
consumers have to credit, and that consumers awareness of credit has been heightened by the
media and the competition
 “I don’t think that consumers are any more knowledgeable than they were. I think consumers have
been conned and the consumers are easily conned”. Professional people in the market place, a
small percentage, are more aware. “The average consumer today is still extremely naïve and
easily lead” for example, they only look at interest rate, “haven’t got the capacity of actually
understanding the long term cost”.
Borrowers propensity and ability to pay and saving rate

All respondents report a change in the attitude of borrowers’ to bankruptcy:
 “Bankruptcy high and defaults low because people who would have stayed in default are going
bankrupt because of attitude”
 “The stigma is not there as much. People can just roll over and start again”
 An interviewee argues that younger market were treating a home loan as cheap rent. With
negative equity in the place, the youth market can bankrupt themselves, then walk away. A
different attitude is the reason, rather than inexperience in managing credit
 “A colossal increase in propensity of the community to take on increased personal debt. And that’s
occurring in a variety of ways across the whole board. To do with the structure of society as well,
higher degree of home ownership, greater desire to take on credit to satisfy these things. So,
personal bankruptcy is attitude to debt, attitude to savings. Strong appetite not to save but to
acquire things”
 “Societal change where people instead of taking ownership of their own problems tend to blame
other people … You gave me the money therefore your fault … Denial of responsibility”
 One interviewee argues that there is not a strong correlation between bankruptcies and

unemployment, although the correlation may be strong regarding the rate of change. The issues
with bankruptcies “is the level of over-commitment we are securing in the market and people’s
ability to service that”. Since deregulation, we have seen an increased proliferation of lending.
Also, people are more willing to go bankrupt now –an attitudinal aspect.” In the US, the economy
is growing, unemployment is falling, and they have record personal bankruptcies as well. “We
need to build propensity models for bankruptcy into our systems and have that done, rather than
use general indicators in the economy”.
There is mixed reporting on the consumers’ knowledge relating to bankruptcy, or a poor credit history
generally:
 The reason for increased bankruptcies was given as a change in general knowledge
 “People realise now that they will not get credit if they have a poor history”
 It is argued that personal bankruptcies will continue to grow, as a reduction in interest rate had
come too late for them. Borrowers are overcommitted and have been for several years and just
can’t hold on any longer. Bankruptcy “It’s the easy way out” but “lot of lack of understanding of
the implications of bankruptcy” on credit record
All interviewees report that the vast majority of borrowers who default are “unlucky” rather than
“dishonest” (as discussed in the Chapter – Credit Rationing):
 “Mainly borrowers are good – there’s a small number of cases that are mainly accidents … Well
intended people, uninformed, or whatever, set of with the wrong ideas that didn’t turn out. Small
number of dishonest / unreliable whatever”
 “I have not had a great experience of that” (borrowers making a conscious decision to increase the
riskiness of their behaviour). “Borrowers have an obsession with their idea, and as misguided as
that may be, it may cloud their objectivity in firstly committing their own resources as well … No,
don’t hold with that ... Undoubtedly there would be some, but the number will be 0.0 something.
The main casualties are through misadventure, with few deliberate attempts. They would be the
minority.”
 “Forgetting the professional fraud, the vast majority of people enter into a contract with the
intention to repay. Their circumstances may be such that they can’t do it, and I think the measure
of that is the loans which go bad almost immediately. They are the ones you would have to say
your assessment procedures may not have been as strong as they needed to be”. The fact that there
will always be some people who deliberately set out to pay you is factored into scorecards and
pricing
 “That is bad luck or purely lifestyle. But we can’t discriminate and we can’t ask people what their
drinking, smoking or other preferences are… nor would it really help you anyway”

 “No borrower believes he will go bust. They have access to information but process it incorrectly
… Banks assess risk coldly, but small businesses do not take account of small probability of things
going wrong. Too catastrophic at personal level to contemplate”.
The were two key factors affecting “unlucky” borrowers.

 “Two key factors for arrears and reasons for it: Unemployment / bankruptcy and relationship
breakdown – 75% to 80%”. The second can often lead to the first, as people take their minds off
the job. The FI has “two fully qualified counsellors for people who can come and talk to them”
 Other situation is that security of lifetime employment also is lost, such as Commonwealth public
servants. However, these people walk out with substantial redundancy pays and are not a problem
in terms of repyaments. “The problem we have are people who lose their job in the normal course
of events or they become overcommitted or they face divorce”.
One interviewee places great emphasis on the FIs prudential responsibility to only provide consumers
with a level of debt that they are capable of servicing:
 “People are their own worst enemies. They always believe that they can afford to do more than
they actually can and we probably have to be their protectors … Say to people – you believe you
can afford $600 per month … why haven’t you got this amount saved in the bank, even excluding
rent”. Thus, “in a lot of cases consumers can’t afford what they are looking for and the FIs
basically have to look after them and make sure they don’t overcommit themselves”. “People are
really fooling themselves as to what their ability ot commit themselves … if what they are doing is
relying on an increased wage packet to help them over time they really don’t understand the
complexities of the economy.” Basically, the increase will help with food and so on, its not going
to help with the house plan. “We as lenders have to protect consumers from themselves”
 It is argued that the increased availability of credit has not benefited all borrowers. “Made the
consumer who should never borrow money able to borrow money. And of course they get
themselves into trouble and then turn around and blame the banks”.
Most interviewees report that consumers are not good at establishing and maintaining savings plans:
 “People spend what they earn. Definitely unsophisticated – don’t think along lines of good
economy and bad economy and should put away more”
 “These days, people don’t put things away for a rainy day (not like they used to). Used to have to
save, now people just consolidate. Different attitude”
 It is argued that products make it much easier (for example, home equity loan) so you do not have
to plan ahead for the rest of their life

 “I don’t think most people do a lifecycle plan until they hit 50 … 95% of the population don’t
budget well ”, regardless of their socioeconomic background. “The five percent who do budget
probably are the best lending risk irrespective of where they come from or what they do for a
living because they stay within their means”
 “With housing loans, people’s lifestyle changes as they grow, they get married, have children, two
incomes down to one income back to two incomes, they have different lifestyle expectations which
affect that” With the other loans (short ended products) it doesn’t have any impact anyway and
that is why credit scoring works
 “In Australia we live for today and live for tomorrow .. we don’t plan out … people’s wants and
desires are always different … something’s going to happen in five years and we recognise this”
Two interviewees comment that some segments of the population, at certain times, do save:
 One interviewee comments that he is seeing some quite sensible saving plans, with significant
events, such as when people get engaged. The plans maybe are not as long term as the life cycle,
but over the next ten years, probably. But, he noted, this was a limited sample based on who their
parents are
 As to whether consumers will be sophisticated in their planning - “Certain segments of society do,
based on where they came from and their experiences and some other people who may not have
had those experiences may not … As people go through different phases of their life, as they get
older these things do start to come under control and it just naturally sorts itself out”. Further, “If
people are carrying a lot of debt, it may make it harder to consciously smooth debt. …The whole
market is putting greater temptations in front of people to do a whole range of things -
consumerism and materialism”.
It has been reported that it is more difficult for people to save and plan in current times:
 “Cost of living has far outstripped saving. People are more accepting of debt, but lot of them
probably could not survive without debt. Need two incomes”
 It is argued that, in Australia, a long term commitment is twelve months to three years. “We don’t
understand the concept” of long term planning “and even if did understand the because the
economic situation is so volatile, for example superannuation … How are you meant to plan for
your old age … when they keep moving the goal posts all of the time”
There has been mixed feedback on the current level of debt:

 In response to the query whether we have moved to a level of personal debt that is sustainable -
“Think we are right at the top edge of it”

 An interviewee commented that he does not believe people have too much debt. Whilst people say
there is not enough savings, we have always been dependent on foreign investment to grow. He
does believe there are sections of society which are overcommitted, and there always will be, due
to their circumstances and attitude to life
 An interviewee comments that the level of debt (as high as it is) is not a problem. In the United
States, the high level of Card indebtedness is a major problem. However, in Australia, where
borrowers tend to tie financial accommodation with home ownership, it is less likely to be a
problem
 “Most people will fully gear themselves at all times. Despite it, they don’t care”.
Effect of low inflation and interest rates

Interviewees have a major concern with borrowers’ ability to manage in an environment of low
inflation and / or increasing interest rates:
 “There is nowhere to hide any more” with a low inflation level. If your assets are not going to go
up faster than your debt is going to go up, then something is going to go wrong. “The way the
community is acting is as if we are still in a high inflationary period. You have to go and buy and
borrow because if you don’t it will cost you more tomorrow”. It is not sustainable because we do
not have a high saving level in the first place. This is where the threat comes in - if interest rates
are too low, everyone just borrows and borrows. Bankrupts now relate to people who were able to
just hang on and were hidden by inflation rate
 “In the past inflation and asset growth has helped us in the housing cycle.. That is not occurring
now. Someone who is incurring debts and see their property … grow 30% in five years and then
sell and clear all their debts – does not occur anymore. So they can’t clear their other debts”
 “Think there is an expectation that salaries always will increase in the future, which may not
happen in the future”.
Consumer demand
Consumer demand also has been raised as a factor affecting the level of credit in the economy:
 “A degree of uncertainty in people’s minds as to whether they wanted to borrow or not .. So, the
consumer started to pull back but at the same time the consumer was pulling back you had far
more financial institutions coming in and being far more aggressive in their desire to lend money
and maximise their return based on their capital base”.
The future of risk-based pricing

Interviewees argued that the critical factor for the introduction of risk-based pricing is the requirement
for a broader-based approach, through customer relationship pricing:

 “If all go the way of customer relationship pricing and customer scoring and so on, which we all
say we want to do, part of this is having the ability to price on risk”. Everything is driving us back
to the only way to compete is on relationship issues and relationship pricing - we can have the
same product, more or less. “But we still have got a whole way to go before people will accept
that there is a cost of banking as well as a benefit of banking. If you want the service, you will
have to pay for it.. Then we will pay you on the other side for what you bring back to us. Until we
get a market acceptance for the way that is business is done – have to break that before we can
break the other side”. Customers still want all the services at less than cost, as well as low loan
rates. Consumer credit code means you can’t charge all the fees you want to, as well as having to
lure customers with cash back for taking out a loan with us
 “We score the customers profile of risk across the total relationship we hold with them so we can
treat them accordingly. We enter into that field then we are going to move to more rational pricing
based on our expected return. Think what we will see is rather than a product based pricing
rational more of a customer based rational based on customer relationship and the products and
services they use within an organisation. We can package and manage the risk better when we
have a full relationship. I think that’s when we will move to credit rationing on that basis. I don’t
think we will move to it in any other form until we get there”
 “When you go to the customer relationship situation, you have policies in place that will really
measure the customer’s performance, risk grade it, and then treat the customer according to the
ongoing risk grades. You might well be to the situation where a customer has all sorts of limits in
place and over say a three month period their circumstances change and their behaviour patterns
clearly shows they are changing and you shut down those limits”
 “A credit card business alone is cyclical. More holistic when relationship lending (ie transaction,
mortgage, insurance)”.
Can credit be managed excellently?

When asked if it was possible to manage credit excellently, a key message from interviewees is that it
is important to have a solid portfolio, to be able to obtain competitive advantage if competitors are
needing to repair their balance sheets.
 “Because the major banks were focused on their commercial side, we had the opportunity to steal
volume, so we grew”
 “Have a reputation as being good on the credit side. Must do something different. People who
make the decisions. Why should it be different - An intangible. Attitudinal is different. The skills
are based on similar base education and same market place. Hence, obviously attitude but the rest
should not be that different”

Two interviewees comment that there was a large element of luck in the Big Four Bank which had
managed its credit quality well in the late 1980s, early 1990s:
 “They said they credit rationed their exposure (deliberately) but their ability to lend was severely
constrained by the funding situation at the time. They just traded off and said where was the most
profitable business. Therefore they kept out of the corporates and property developers”. It was
“Probably more by good luck than good management … Probably were more lucky because they
did not have a surfeit of capital compared to others” “if you look at banks went into it hard, they
all had new managing directors and senior management team (and not kept with mainstream
banking for new hires)”
 “I still refuse to accept (the CEO) saying ‘I knew it was going to happen’, he just punted on
something and was lucky”.
Excellent broad-based skills are required to be a good credit risk manager:

 “Before in the Bank, they had people who ran credit who were just good at approving credit
transactions. Now they have credit risk management, end-to-end – control, monitoring, process,
dynamic provisioning, etc. That is, need to know the whole spectrum ... Credit risk is just like
managing a business. Its not just like being a credit officer”.
One interviewee comments that he does not think anyone can manage credit superbly over a cycle. He
pointed out that one and a half mistakes per hundred are allowed - but it does not take much for this to
increase to five and a half mistakes. The interviewee further comments that the FI’s position is
associated with their core group of customers, and whether they can withstand the economic cycle. The
FIs really need customers who can re-energise and re-profit themselves to take advantage of the cycle -
as long as the company survives through the downturn, and is not too seriously disadvantaged in terms of
economic position.
Looking forward, FIs are confident of their ability to manage credit risk:
 “We actually understand the risk / reward in a much greater sense. If you look at our organisation
a decade ago, we were actually very naïve”.
Active, counter-cyclical lending

A key theme to emerge from the Senior Credit Manager interviews was the need to pro-actively, and
counter-cyclically, manage credit across the business cycle:
 An interviewee comments that policy was loosened too late, but not intentionally. “Deep down
reason you loosen too late, not because it is a decision to do that, but because your mind is
focusing on other things in the future”. There is a focus on yesterday’s problems being fixed

today. Once the issues have been identified, “people in the back room to fix the problems caused
yesterday, and then stick away and control them somewhere”. Then, “There’s a light at the end of
the day. What should we be doing? Heh, we could be doing some of this. …It’s not planning – it
is a focus issue – you are in crisis mode”.
Another interviewee provides an example where an FI had a competitive advantage where they could
be less stringent in their pricing than competitors:
 Putting out recession buster loans towards the end of Phase 1” (that is, shock and remorse in the
credit cycle model provided by the researcher). “We really were saying, heh, we are a lender in
the market and we’ve got money to lend … You look further forward ahead the less problems
you’ve got”
The need for active management has been highlighted:

 “Took too long for the banks to realise they were in trouble .. Lot of hype and some big falls.
Even with high interest rates, property prices were “just nonsense … “If anyone had really taken
the time to stand back and say okay what is holding this thing, what is underpinning this thing,
then they would have realised there was no floor there and it was going to come down with a
thud”. The banks should have pulled in their horns in about 1988 - it was the property market that
drove down the economy.
 In retail, put effort into in credit management in late 1991, and losses peaked in fiscal 1992. The
warning signals were in early to mid 1991. “But by then the die was cast”. The bank was
managing it in a fairly traditional way at the time.. “The payback from trying to manage it better
came fairly quickly. That was aided by the turn of the economic cycle plus the benefit of the extra
effort tended to flow in a fairly logical kind of way”
However, one interviewee argues that Senior Credit Managers should simply aim for consistent
standards across the business cycle:
 “the pendulum does swing … By the time the crisis has come, its probably past and you don’t need
to change your credit policies. Its all over. What you try to do is read that in advance”.
Organisations now are being driven by their marketing and credit tends to be running behind it a
little bit. “You should strive for a consistency of credit over time, which removes much of this mood
swing … If you are consistent in your credit assessment through what you are doing you will take
care of the economic cycle by that means. If you try to second guess the cycles, you probably will
make more mistakes … you will always pick the wrong time and end up with problems. The worse
thing you can do is be inconsistent and change with a good situation”.

6 Copy of Interview Guide Used for Lending Officers
This Appendix provides a copy of the interview guide used in the interviews in all Banks in the
Lending Officer interviews.
Background
Thank you for meeting with me to talk about lending practices here at the Bank.
I am doing a PhD thesis on credit risk management in retail banking at different points in the business
cycle. As such, you are helping me personally to complete my study - and once again I thank you for
that. In addition, your input will be helping me to build a monitor, or series of questions, which the
Bank could use to measure its credit risk attitude (or credit culture) at different times. The monitor will
provide one more tool that the Bank could use to know what is going on, and also provide you with a
formal feedback loop.
The credit risk monitor will be based on a series of interviews with a number of other banks. I am
conducting interviews with about “x” Lending Officers from the Bank. There will be a mixture of
focus group interviews and one-on-one interviews - I am mixing the approaches. In terms of why you
were included (nominated) as a participant - first up, I got the Senior Manager’s okay to conduct the
interviews, and then he got “x” (or other managers) to nominate participants according to a set of
criteria.
Outline of the session
Planning to take up to one hour

Will record the interview. Any comments you make will be kept confidential. Your responses will be
aggregated with other Bank people; and in the final results I will not be reporting Bank results alone.
If any time you are uncomfortable with a question, let me know. We can either move on the next
topic, or we can terminate the interview at any time
Any time I ask a question that is unclear, let me know, and I will try to make it clearer.
I will be asking you to focus on examples of your actual experiences and perspectives (ie. focus on
specific situations and actions as perceived by you) rather than your attitudes and general opinions on
issues.
There are no right or wrong answers; all opinions are valid and legitimate. Encourage you to put
forward all contributions, and do not tailor them to be in line with what you think other participants’ or
your manager would expect you to say.
“Rules” of the focus group interviews:
 No derogatory statements about another members’ contributions - there are no right or wrong
answers
 Stress that all experiences are equally important
 As many opinions as possible are sought
 Objective is to identify all the issues, rather than achieve consensus
 Solve problems through self-management:
 If the group gets off the track, someone within the group typically will bring the group
back to the topic
 Common problems include: Getting bogged down in definitions or detail, not all in the
group contribute equally (some very talkative, some not at all), some participants

 “ramble”, group leaves the primary topic, some participants act as an “expert” (none of us
are, as we are addressing each of your perspective)
 Encourage you to use questions to direct the flow of the interaction
 Encourage you to respond to each other rather than me
Introductions
Pls introduce yourself (yourselves) - name, how many years in lending, where you work now. I’ll
start. I worked with Citibank for about ten years in credit. Currently I am working with KPMG as a
Management consultant. Whilst I will be familiar with most of the general credit practices and jargon
in retail lending, I won’t know the how these practices are applied at the Bank.
Purpose
The goal of the interview today is to examine how the Bank manages credit risk across the business
cycle.
We will focus on how credit standards are tightened or eased, as demonstrated through the controls
and disciplines by which strategy, policy, and operations are managed. There are two key objectives:
 Identify the factors that highlight to you what the credit risk attitude is, as established by Senior
Credit Managers
 Determine what you consider to be the key aspects of credit risk management to be able to make
sure you are booking the loan applications that will result in a good quality loan portfolio.
Key terms
Are you familiar with the following key terms? These are the definitions we will apply:
 Credit risk appetite - the level of credit risk the Bank’s senior management wants to take on. One
way to view this is to look at the extremes: At various times, lenders can either focus on growing
market share rather than building a good quality loan portfolio (and have relatively “easy” lending
standards) or focus on minimising credit losses rather than maximising the amount of new
business (and have relatively “tight” lending standards)
 Credit culture - hard to define - this is the underlying approach to credit, the “way we do it around
here”. It probably does not change a lot over time
 Credit standards - the overall approach, which is a mixture of credit policy and credit practices /
operations.
 Credit policy - the formal / official lending policies
 Credit practices, operations - the way the credit policy is applied in a day-to-day,
operational sense
Initial reactions
 Note down your initial reactions and experiences relating to the questions on the sheet. (refer
attached). These will be collected at the end of the session.
Questions
1 The credit risk attitude in the Bank
 Do you think the credit risk appetite changes over time?

 What do you think drives the tightening or easing of credit standards
 Rank the importance of each of the factors
 How do you know what Senior Manager’s credit risk attitude is at a point in time, based on actual,
observable behaviours?

 amount of business being written
 changes to credit standards (overall controls and disciplines), credit policy, credit
operations
 changes to terms and conditions
 What reward structures / measures are in place to tell you what you should be doing?
 Rank the importance of each of the factors
 State of the credit risk attitude
 What is the credit risk appetite now?
2 Quality-focused credit culture
 What are the key “factors” you must have in place and must do really well for a quality-focused
credit culture (regardless of where you are in the business cycle)
 Do these basic factors change, or is it how they are interpreted that changes?
 Rank the importance of the factors
Closing questions:
“If you had the job of summarising how the whole group (you) feels about this topic, what do you
think you would say?
Gather sheets
As a result of our discussion today, would you say that your comments on the questions asked at the
beginning of the interview are:
 Basically the same
 Some minor changes (but really only enhancements / additions to the same general theme or line
of thinking)
 Some significant changes (that is, fundamental changes to the general theme or line of thinking)
Wrap-up
Do any of you have any final questions?

Gather the information sheets participants filled out initially
Please don’t talk about with your colleagues - prefer to get each person’s input “fresh” without them
preparing for the interview
Again, I would like to reinforce that your information will be kept anonymous
Thanks for helping

Information Sheet Used in the Interviews
The key aspects of credit risk management (relating to both policies and operational practices)
the Bank must have in place to book good quality loan applications include ...
The key indicators of the Bank’s credit risk attitude (that is, the focus on credit risk as
compared to other areas such as sales growth) include …

7 Copy of Responses Sent to Banks A, B and C after Lending
Officer interviews
The responses sent to Banks A, B and C are shown separately in this Appendix.
Bank A Cards Lending Officers
Question: “What are the key aspects of credit risk management (relating to both policies and
operational practices) which must be in place to build a good quality loan portfolio?”
Lending Officers were not asked to rank their perception of how well the current processes and
practices within the Bank met these key aspects. However, the issues raised highlight the areas which
management should ensure are in place, from the Lending Officers’ perspective. Where I perceived
that an aspect was a major issue for the Lending Officers, I have added a comment in italics. A word
of warning: As I did not specifically ask Lending Officers to rate their satisfaction with the key
aspects, this is my perception only, based on limited information.
Topic Description
Policy “Good” policy, focusing on the credit basics (such as character,

capacity, collateral)
Stable and consistent lending policy and decisions
The intent of the policy is well communicated; there is sufficient

information provided to understand the “big picture”
There is two way communication on policy
Written guidelines are provided
There was a strong perception that credit policy and operations were
too removed from each other.
Stable and consistent Management provide a stable and consistent lending approach, in terms
lending decisions of policies
A stable and consistent lending approach is supported between Lending

Officers
Lending Officers are confident in their assessments, leading to

improved consistency
Support and On the job training and cross-checking of approve/decline decisions are
communication encouraged through ongoing discussion between lending officers.
between Lending More experienced staff assist the newer staff
Officers

Topic Description
Lending Officers Stable and consistent lending decisions

demonstrating sound
credit skills Assessors with sound lending knowledge and experience
Lending Officers felt that they were responding to “the system”. They
were not satisfied with the level of decision-making responsibility and
the variety of analytical tasks they currently have as compared to the
past.
Integration between There is strong communication between areas

areas
There is consistent policy between product areas
The different areas (for example, Credit Policy, Loan Operations and
the Branch/Retail Network) should have common drivers and
performance measurement.
There was a strong perception that the above factors are not in place
currently.
Management Managers should demonstrate strong management skills, be accessible,

and support their staff. There should be a stable chain of management.
Systems and scoring Systems should “work”, in terms of up-time, reliability, processes
applications accurately, etc.
Rules in the system should match credit policy, and not be forced from
the system unnecessarily for manual review.
For applications to be processed consistently, the point scores need to

work for all products
Systems were a major issue, generally.

Integrity / Morality Lending Officers should be comfortable that Bank policies are
prudential – for example, only the borrowers who can afford and are
likely to repay the debt should be provided with a credit card. A
representative comment was “the credit worthiness of the applicant is
becoming less and less a factor in decision making”
Overall, there was a perception that customers were being offered too
much credit (based to the Lending Officers’ experience). The
possibility that customers “would go straight to collections” was
mentioned several times.
Customer focus Existing customers should be recognised
Learning lessons Policies and practices should incorporate learning from prior
campaigns
Statistics and volume Information is needed. A representative comment was “we’re closely
related to what the stat’s say”
Training A mixture of formal and on-the-job training is required.
Lending Officers felt that very little formal training is provided

Question: “What drives the easing or tightening of credit standards”
There was a strong perception that competition and the need to increase the size of the book drove the
setting of credit policies. The Cards staff focused on the effect of Campaigns, with significant
comment being made as to policies changing to assist in acquiring accounts through the campaigns.
The secondary reason given for the perceived change in the credit standards was productivity, and the
need for large volumes of applications to be processed. The third most predominant reason given for
the changing of credit standards was the level of bad debts or accounts in collections. Finally,
Lending Officers mentioned an increased focus by the Bank on meeting customer expectations.
Question: “What actually changes when the credit risk attitude changes? How do you know
what the credit risk attitude is at a point in time and what you are meant to be
approving/declining?”
Staff focused on policy changes, including:
 Formal policy changes, as advised through written policies, especially relating to campaigns
 Policy changes, advised of verbally from management, through team meetings. There was a
strong emphasis on the interpretation of managers comments’ by the Lending Officers (as
compared to specific wording of formal documents)
 Less formal feedback on policy changes and approach, such as:
 The requirement for all declinals to be subject to “hindsighting”
 The changes in the system / scorecard to approve a higher percentage of loan applications
 The proportion of approvals to declinals
In addition, staff mentioned that their own perception of the “general well-being of the Australian
economy” would affect their predisposition to approve or decline a loan.
Finally, Lending Officers mentioned the focus on driving the volumes of applications in interpreting
what the credit risk approach is at a point in time.
Interestingly, there was very little mention made of formal performance management contracts.

Question: “Compared to other points in time in the credit cycle, what is the credit risk attitude
at the moment?”
Whilst a couple of respondents commented that the Bank was being strict on applicants with high
lending standards, most respondents commented on:
 The drive for volume, with the responses typified by “emphasis on the need to process
applications and process them quickly too… We reduce our quality and so on”
 The need to write more business, with responses typified by “We want to do the deal all the time,
and rather than try and find the reason for declining it, they’re finding a reason to approve it. Or
help the loan through”

Bank A Mortgage Lending Officers
management should ensure are in place, from the Lending Officers’ perspective. Where I perceived
that an aspect was a major issue for the Lending Officers, I have added a comment in italics. A word
of warning: As I did not specifically ask Lending Officers to rate their satisfaction with the key
aspects, this is my perception only, based on limited information.
Topic Description
Lending Officers’ Training was the most frequently mentioned requirement for a quality
development credit process.
The inherent ability of Lending Officers was raised, relating more to

recruiting the right person rather than actual training.
A few interviewees commented on the educational requirements being

increased for the Lending Officer (namely, tertiary qualifications). A
number of the Lending Officers did not have tertiary qualifications, and
felt they were not in the position to go back and study.
Career pathing opportunities was another factor mentioned by a

number of interviewees. Traditionally, Lending Officers would work
up through the ranks, which “gave a good grounding in credit”.
Without a tertiary qualification, it was commented that “the career
paths aren’t there anymore”.
Overall, Lending Officers reported that their skills and knowledge had
decreased, because they were doing less complex tasks and there was
less end-to-end completion of tasks. A representative comment was “I
used to know everything, now everything’s so specialist”.
Interviewees commented that there was extremely little formal training

provided, and that there should be more. The potential discrepancy
between increased educational requirements for Lending Officers, less
emphasis on “coming through the ranks to learn credit”, and the
decreased skills required in the automated Lending process appears to
be an issue which will have to be managed.

Feedback on lending The need for feedback on the delinquency and loss performance of
quality loans that Lending Officers had approved was mentioned consistently.
It was reported that the feedback had been requested a number of times,
with a representative comment being “I haven’t heard any feedback on
my lending quality since I started… No matter how many times you
ask”
Branch interface The consistent approach of Branches and credit areas was a key
requirement.
The role of Branches was seen by all participants to be a major

concern. The primary issue was the accurate entry of information into
the system, particularly as the automated review of loans meant that a
Lending Officer often would not review a loan to detect problems.
Lending Officers estimated that there would be any where from a 25%
to a 95% error rate in terms of the “perfect application” (including data
entry, lending knowledge, etc) in the loans that they reviewed. It
should be noted this figure is likely to be inflated for the overall
portfolio, given the Lending Officers only see the “exception” loans.
The “really good loans” often would be processed straight through the
system. It was felt that a 10% error rate would be more acceptable.
Lending Officers stated that the level of inaccuracy with Branch-

entered applications was a function of:
 Insufficient training
 Branch staff having to handle a large volume and variety of tasks
 Deliberate falsification, given the Branch staffs’ performance was
based on volume of loans written rather than their credit quality
 A need for disciplinary action if Branch staff were found to enter
data inaccurately
 Through inexperience, Branch staff believing what the customer
tells them, even if the information provided was not consistent
 Taking the customers’ side, to protect the ongoing relationship

End to end review of All Lending Officers reported a requirement for clear expectations as to
loans what extent Lending Officers should be either conducting a full review
of a referred Loan Application or reviewing the discrete component
which was the reason for referral. The expectations should be clearly
defined in the performance management contract.
Interviewees reported that there needed to be a completeness of review,

with any issues being raised, as there was a discrepancy otherwise if a
loan was referred to a more senior authority for review. A
representative comment was “You are approving outside the CAD,
however, given that the information was submitted by the Branch, then
its got to be correct….The senior credit authority would have you for
breakfast. Chew you up and spit you out”.
Overall, this was an emotional issue, with Lending Officers arguing

that the only way to obtain quality in their credit analysis was a full
review of the file. Representative comments include: “It’s very hard to
switch off the do-the right-thing-attitude to get-through-the-workload
attitude” and “On one hand we’re doing things wrong because we’re
checking things we shouldn’t be checking, but on the other hand we
aren’t … I have a quick look through the connection details …I
basically know a lot of what the common errors are and I give a quick
once over to how they’ve loaded up the application …. Nine times out
of time there’s something wrong with it”.
Intermediaries Intermediaries (originators) should be controlled.
Good policy Good, consistent policy is required. A representative comment was “a
loan that had been approved on 10th February, if it was resubmitted on
the 12th February, it could be declined by the system”.
Managers setting credit policy should focus on the market, to identify

and factor in trends in the market.

Policies and practices Interviewees commented that Lending Officers should be comfortable
support writing good that the policies and processes support them writing good quality
business business.
A couple of interviewees stated that they felt there was a conflict

between the current practices and what they felt were correct practices.
The interviewees reported that, where possible, they tended to follow
the latter, “so they could sleep well at night”
There appears to be a transition issue with the more traditional style

lenders as the lending process becomes more automated. The
frequently reported system and data integrity-related issues did not
increase the Lending Officers’ confidence that the automated process
could be relied upon to provide a quality decision.
Number of staff The appropriate level of staffing is required to handle the volumes,
both within Lending Operations and in the Branches.
Mortgage is low risk Several interviewees commented that lending against residentail
lending mortgages is comparatively low risk business, and the policy and
process should reflect this.
Customer focus Generally, interviewees reported that customer satisfaction needs to be

managed, with the centralisation of processing meaning that customers
are not getting the personalised attention from Branch Managers.
It was reported that the focus on cross-selling more product should also
be managed. A representative comment was that customers should not
be inundated with the aggressive selling of products “which they didn’t
need”.

Interaction between Discussion between Lending Officers is required to understand and

Lending Officers and apply policy, leading to consistency. A representative comment was
with Senior Lending “we would bounce ideas off each other here, so we work collectively”
Officers
In addition, it was reported that Lending Officers should have the time
and the right to access to senior lending authorities, to obtain feedback
on the appropriate way to interpret policy.
Systems All loans held by the borrowers should be included in the loan
assessment, thus the system should incorporate all relationships.
The system should be updated immediately to reflect policies. It

should be “user-friendly”.
A representative comment was “the system has got to be able to take all
that information and consider it all. So that the assessors can trust,
which I think is an important word, trust the information that’s coming
in, so they don’t have to go and check them all the time”
Generally, it was reported that “the system” was inadequate, out of

date, and not tailored to the Bank’s requirements.
Data integrity / Consistent with issues raised in relation to the Branches, participants
quality control reported that there should be an adequate level of checking of data
integrity and quality control.
Communication Communication was reported by all interviewees, in one guise or

another, as being a critical requirement. Of particular importance was
the immediate communication of policy changes (both formal, written
policy and its more informal interpretation) and what is expected of
Lending Officers.
Good management Good management is a generic issue. Generally, a “good management
style” is required.
Consistent drivers Sales and credit teams should work together towards a common goal,
rather than having conflicting drivers.

Question: “What drives the easing or tightening of credit standards”
Most respondents reported that the primary factor driving the relative “tightness” of credit standards
was the need to build market share, with a strong focus on campaigns and advertising.
Another major factor was the drive to improve efficiency and productivity. A representative comment
was “Mostly volumes because the quality is difficult to monitor”
Other factors mentioned, to a lesser degree, were:
 The level of bad debt / accounts hitting collections
 The focus on shareholder value, with shareholders demanding high returns
 Peer pressure from Branches, whose “performance related solely now on sales”
 Peer pressure - “sort of an attitude within the Centre”.
Responses to the question focused on the changes in policy, in terms of:
 Formal policy changes, included in the lending policy instruction manual and memos
 Changes of emphasis, or subtle changes of rules, within the policy
 Interpretation of verbal messages from management relating to policy, with team meetings being
the main forum
In addition, feedback on how policy was being interpreted by senior credit authorities was obtained
when:
 Loans were referred for a higher approval
 A query regarding policy, or the interpretation thereof, was made “up the line”.

Further, the “system”, or the rules by which the system processed loans, was reported to show whether
management was tightening or easing credit standards.
Finally, feedback from external factors, primarily the economic environment, was incorporated by
Lending Officers in identifying how they were meant to review loans.
at the moment?”
Overall, it was reported strongly that policies were looser and the Bank was aggressively chasing
market share. Representative comments were “they’ve also relaxed the guidelines and you see some
tragedies getting through” and “…we’re here to right business and not to knock it back. Now unless
it’s a dead duck, for whatever reasons, we should be trying to find a way to manipulate, for want of a
better word, that application into something that we can”.
The focus on the need to process high volumes of loan applications (as compared to a focus on
quality) was also highlighted.
However, when asked if a downturn in the economy would result in problems like those experienced
in the late eighties, it was felt that there were some mitigating factors.
 Decentralisation was seen to provide a greater level of control. A representative comment was
“Centralisation has lead to consistency;; before you had the branch managers out and they were
doing their own thing”.
 The experience of the problems in the early eighties lead to learnings which would help prevent
problems of the same magnitude recurring.
A comment which is representative of the overall responses by interviewees was “Somebody made the
point not so long ago that we’re writing all this business now, and the system has become more
automated, well out job is ultimately, we will be transferred from assessment into collections”.

Bank B Lending Officers
practices within Bank B met these key aspects. However, the issues raised highlight the areas which
management should ensure are in place, from the Lending Officers’ perspective. A word of warning:
As I did not specifically ask Lending Officers to rate their satisfaction with the key aspects, this is my
perception only of the key issues, based on limited information.
Topic Description
Balancing the sales/ Common objectives are required between sales and credit.
marketing objectives
Sales/marketing and credit need to communicate well, and to think in
terms of company profitability.
Balanced representation between sales and credit administration is

required, through the risk policy committee.
Indicative comments were: “Like we aren’t servicing the same

people” and “The culture of the Bank is ... you’ve got to fight to win
every battle.
Customer retention Retention activity should include a retention team:

versus new sales
 With adequate staffing
 Who can make their own decisions
 Whose performance is not driven by numbers-based MIS
 With enough time to talk to customers and pursue cross sell

opportunities
 With commission based on dollars retained rather than

numbers.
An indicative comment was “service and sales are different issues.

What we do at the moment is purely (sales) turnaround.”

Topic Description
Consistent policies Policies should:

and practices
 Be clear, comprehensive, precise, and well-detailed
 Not be open to interpretation or have grey areas. They should

“define what policies can be flexible and which ones can’t”
 Explain what / why they are (that is, the reason for the policy)
 Be able to be understood by the sales force
 Be in line with, and reflect changes in, the market place.
Policies should be applied consistently between:
 Different authority levels, with an indicative comment being

“some of the credit officers have got into the habit of thinking
if I don’t sign the loan, somebody higher will”
 Between credit officers
 Between sources/channels.
Marginal applications should be declined, as it is not worth the time

spent in arguing the applications’ merits between sales and credit.
Introducer Loan applicants should not have a greater probability of being

management approved if referred through an introducer than through a direct
application. This could result from the introducers being more likely to:
 Know how to “put up a deal”
 Seek a higher authority override for a declined application.
Introducers should have ownership of what they do and provide

applications with integrity of information.
The value of the introducer channel to new sales should not outweigh
prudent underwriting practices.
Credit basics Common sense is required.
The credit basics of how to assess a loan (such as property location and
capacity testing) are critical.

Topic Description
Credit scoring A Cards credit score should:

system
 Be up to date
 Be constant, and not changed for different campaigns to write

more (poorer quality) business
 Not be too much of a black box. Credit officers should have

sufficient knowledge of the scorecard to provide customers
with at least an indication of why their application was
declined.
System The systems should be available to staff as required.
One interviewee commented that there should be “More automation of

the actual assessment process so that the individual credit officers
don’t have to know volumes of credit policies inside and out”.
Communication Good communication should exist:
 Two ways (up and down the organisational levels)
 Between sales and credit.
Lending Officers need to understand the big picture as to “why things
are done”.
Marketing / credit There should be a clearly defined target market, which is adhered to in
strategies all marketing efforts.
There should be benchmarking of other financial institutions.
Sales management Sales managers should tell the sales force “what is going on”.
The sales force should be adequately trained.
The sales staff reward structure:
 should not be too highly commissioned and should have a large

base and low commission
 should reflect servicing of existing customers as well as new

sales business.

Topic Description
Tools/empowerment Staff should be empowered to make decisions, without unnecessary

to do the job bureaucracy.
The physical infrastructure should be provided in a timely manner

without excessive bureaucracy, including:
 Stationery
 Computers, telephones
 Credit Reference Association of Australia access.
Credit authorities Credit authorities should be provided in an appropriate and timely

manner.
Training / experience Thorough training of credit staff should be provided, and not foregone
of credit staff to focus on process volumes.
Training should be provided upon commencement within a Bank

Lending role and on an ongoing basis.
Experience of credit staff is a critical factor.
Staff management An appropriate performance management process should be in place,

including a performance measurement and reward structure.
Staff should not be given an excessive work load based (primarily) on

MIS, which would result in staff burnout and high turnover.
Recognition awards are required for credit staff. An indicative

comment was “the person will want to feel more important to the
overall performance of the company. And want to be recognised for
their efforts.”
Compensation should match performance rankings.

Question: “What drives the easing or tightening of credit standards?”
Lending Officers stated that the primary factor which drives the easing or tightening or credit
standards is the desire for new business, incorporating factors such as:
 Fighting for new sales to increase market share
 Push for new business, which can be processed faster than existing customer business
 Prominence /dependence on the introducer channel for new business. An indicative comment was
“The introducers run the bank”.
Lending Officers also highlighted conflict between sales and credit administration. An indicative
comment was: “It does really feel sometimes, that it’s a major battle, when it really shouldn’t be at
all”.
Lending Officers reported mechanisms which were both formal and informal.
Indicative comments relating to formal factors were: “suddenly a major sales drive, and suddenly all
the tight, clear and concise controls are suddenly put aside and it’s all sales orientated” and
“Change in the policy to get numbers through the door.”
In addition, Lending Officers commented on less formal, intangible factors. There was “pressure
from up top” (passed on through the line managers) and pressure from sales staff. An indicative
comment was: “But instead we get the attitude, or feeling perhaps alright fine, the rules have been
laid down in black and white, now we’ll just suit ourselves try and manoeuvre around it. And I think
that culture has always been within this organisation” and “when they meet their targets, it comes
down from everywhere, it doesn’t matter, just process it quickly, might get heaps more done, you
might do one bad one, but…”.

at the moment?”
There was a very strong perception that there was an “Obvious dominance of the salesforce”, and
“99.9% of the time sales will win if they keep pushing”.
A focus on market share was reported. Indicative comments were: “The Bank has moved from a very
tight credit policy, to very much a looser credit policy to achieve market share”.
Overall, policies were perceived to be “looser”. An indicative comment was “Policy has loosened,
basically to get numbers in”. Exceptions to the overall trend were:
 Cards were perceived to be “a bit tighter than a few years ago”
 Capacity income testing had been introduced, although it was reported to be the weakest capacity
testing of any of the banks.
However, there was a perception that policies were too tight for existing customers in both Mortgages
and Cards. It was argued that this reflected the new sales orientation, rather than the servicing of
existing customers.
There also was a perception that the credit risk attitude was being affected by volume, or process
efficiency, requirements. An indicative comments was: “I guess from a new business perspective,
yeah, it’s push, push, push, to get, I guess, it approved quickly. If possible to get it settled, to get it on
the books, as soon as possible. Yeah, and I guess I’m taking, I’m cutting some corners..”.
Finally, there appeared to be some concerns with the quality of new business. Indicative comments
were: “big push to get business through the door, not having the best business coming through the
door” and “It’s campaign based, but they’re not using their target market as a base for the campaign.
They’re simply going out to the general public”. There was reference made to poor quality securities,
with a comment being made that Bank valuers had indicated that Bank was writing business in areas
other institutions would not.

Bank C Lending Officers
management should ensure are in place, from the Lending Officers’ perspective.
Topic Description
Focus on profit There should be a focus on writing profitable business, rather than
versus volume simply building market share.
Lenders and credit officers need a profit indicator to know what the
profit actually is per loan.
Credit strategies The Bank should know what it wants in the lending portfolio, and have
clear policies to support this.
Credit policies should reflect market conditions, that is, the

competitors’ credit standards.
To reflect segment risk properly, detailed and up-to-date information is

required.
Clear policies and Policies and procedures should:

procedures
 Be clear, not ambiguous, concise, in plain English and user-
friendly
 Be documented in separate Policy and Procedure manuals
 Be shown in the same policy document for all user groups,

with only minor exceptions to reflect differences in the groups
 Be written to accommodate both new and experienced lenders.
Awareness of the Senior Management should incorporate lessons learnt from prior
credit cycle business cycles when establishing the current policies and practices.
An indicative comment was “you hoped sometimes that people who
have lived through that particular period of time are still around to see
the flows, the ups and downs”.

Topic Description
Good A retail credit management meeting (including Product, Group Credit

communication and Head of Retail) can work well to prevent the credit policy makers
“Loosing touch with the real world”.
Good two-way communication is needed between field staff, credit

officers and Group Credit, to highlight changes in the lending market
and credit policies.
Good communication is required to overcome specialisation of

different parts of the lending process into various operational areas
(loan application sourcing, origination, settlement and collections).
Good communication with Team leaders is essential.
Systems Technology should support the lending process as staff are “beholden
to what the Bank gives them”. Systems should:
 Provide access to other products’ systems. An indicative

comment was: “Of course if they’ve got credit with us, we
need to check it and check it thoroughly and be able to
understand what we’re reading. It needs to be clear and easy to
access.”
 Be easy and quick to use
 Provide good telephone system/process to manage incoming

calls, so customers do not have to wait too long
 Keep up with the pace of lending. The systems “need to be

flexible to match what the market place comes out with”.
Generally, systems were of much greater importance to the Unsecured

Credit Officers than the Secured Credit Officers, probably reflecting
the high level of automation in the Unsecured area.
Credit scoring Autodecisioning requires good data to be input – “rubbish in, rubbish
system out”.
In the Unsecured area, the credit scoring system can lead to a better
decision than a judgemental review “Because the system is in place to
look at everything”.

Topic Description
Credit authorities Credit authorities should be carefully managed. “There is a trade-off
between giving lending officers a bigger authority (credit risk) versus
turnaround time. Need to be elective in who give the higher credit
authority to”
The Credit Officer should lose their credit authority if an error is

“bad”. That is, disciplinary action should be taken if staff act outside
of credit policy.
Overrides process A straightforward process is required for override reviews.
Lending Officers should be given feedback as to the approve/decline

decision on the loans they refer to a higher authority.
Quality control Good quality controls should identify if staff “step outside the rules”.
The Quality Review process should be tailored, such that the more
experienced (capable) Credit Officers do not receive the same intensity
of review as the less experienced (capable) Credit Officers.
Standardised process A standardised process should be in place to assist consistency of

decision making. An indicative comment in the Unsecured area was:
“Well you get training before you start over four weeks, and because
you’re doing the same applications, we do VISA cards and personal
loans and things, and it’s the same process over and over, so you’re
just getting different customers all the time, but the process is exactly
the same way.”

Topic Description
Customer interface A good client interview process is required, largely to offset the
removal of the traditional Branch Manager / customer relationship.
The process should:
 Obtain appropriate information.
 Maintain contact with customer
 Identify problems early. An indicative comment was: “I mean

you got people who would speak to you if they were in strife,
whereas now, they don’t speak to you, they hide”.
Customer ownership should be managed well, given the number of

different areas involved in the lending process. An indicative comment
was:
“the lender in the field will do the loan and run to the next one, and
forget about that particular client. So there’s no ownership of the
particular work that you’re doing. And I think that if there’s no
ownership, there’s no care.”
Sell the right product Lenders should sell the right product to the customer:
 Lenders need to know what the customers want to be able to

match the product functionality. For example, they should not
be sold a revolving line of credit if they really just want to pay
off a loan in regular instalments.
Sales performance The sales force’s performance reward structure. An indicative

rewards comment was: “to get that bonus mentality out of the equation,
because you’re only doing a loan because it means dollars to you …
people wouldn’t just concentrate on writing figures, they’d write loans.
There’s a bit of a difference there.”
The commission structure should not encourage the selling of an

inappropriate product for the customers’ needs.
Commission should be based on the loan being settled, rather than the
loan application being approved.

Topic Description
Well informed Training for mobile lenders needs to:

mobile lenders
 Be meaningful, good quality and concise
 Allow for the fact that the sales force are not lenders
 Focus on communicating with customers, as most complaints

are not about the credit decision, but the appropriate
communication.
Field staff need to know if the loan application is worthwhile (that is,
justifies raising a loan application).
The process should ensure that mobile lenders get the all the
information and documentation up front.
Field staff should have a strong work ethic.
Training for credit Training for credit staff needs to be excellent. Training should include
staff both formal classroom training and the “buddy system” (sitting next to
someone on the job).
Training should be consistent, regardless of the “buddy” allocated.
Career paths Career paths should be actively managed in accordance with different
career aspirations. For example, Cards’ staff comments varied from
“It’s quite repetitive. So I’m hoping to move on.” to “I love it…well
retail, I enjoy talking to people, and different people all the time,
you’re learning new things”.
Flexible working Flexible working hours should be accomodated. It may be necessary

conditions to modify training and other communication mechanisms for the part-
time staff.

Topic Description
Performance Incentive targets should be established for each individual, over and
management above the group’s average or benchmark target.
Small awards such as movie tickets can be well received.
Regular MIS should show how the credit officer has performed,
including both the quality and quantity of work undertaken.
Credit Officers needs collections exposure and feedback on the

performance of the portfolio which they approved initially.
Appropriate performance expectations should be set given the type of

lending undertaken. The probability of default on a loan portfolio
could vary due to the inherent risk of the portfolio, rather than the
Credit Officers’ decisions. An indicative comment was: “Because
they’re outside the normal lenders guidelines, so I get the ticklish
ones”.
Credit Officers should be able to learn from experience without fear of

punishment. There are elements that the Credit Officer has no control
over, such as marital breakups and loss of income through business
failure, job loss and sickness. An indicative comment was: “Also I
believe that if a loan falls on bad times, for whatever reason, I think
that the person that wrote it, not, no blame should be given”
Personal pride in the work should be encouraged:

“Because you just have this loyalty to the bank, well I do, I wouldn’t
want to just make a sale and know that that money was going to be
spent and never repaid.”
Credit basics “The bottom line is common sense.”
Credit staff should be taught the credit basics such as: “Serviceability
calculations are not predictive of problem loans (that is, serviceability
and willingness to pay are separate things).

Question: “What drives the easing or tightening of credit standards?”
The primary factors mentioned by Credit Officers as driving the easing or tightening of credit
standards included:
 Prevailing conditions in the market, with an indicative comment being: “… we encourage them to
see what the opposition is offering. That way, you know what the market trend is, and we don’t
want to be at the top of the market, we don’t want to be at the bottom. So we try and keep
ourselves in the middle.”
 The focus on sales, with reference to the performance reward structure of the sales force. An
indicative comment was: “Yeah well you get paid for that, and their boss gets paid on what they
do. And I presume that he gets pressure from his boss.”
 Feedback from the customer base
 Financial conditions within the Bank, such as extra funds
 Portfolio segments identified as being potentially problematic. An example was employment

areas such as computing where loan applicants are employed largely on a contract basis
 Performance measurement being based on volumes of loan applications written, with expectations
on turnaround times. The emphasis is unsecured was on the “strike rate” without including the
quality of lending (with the credit scoring system playing a major role).
Other factors mentioned were:
 The Bank has “… grown as an organisation, and are trying to compete on level footing with the
major players”
 The Consumer Credit Code. It was argued that it was initially hard to define “what is reasonable”,
but lenders would get better with experience
 Changes in borrowers behaviour. An indicative comment was “you look at the style of living
nowadays, there’s more marriage breakups, there’s more bankruptcies, it seems to be the trend”.

Formal changes in policy were noted as the primary factor reflecting changes in credit risk attitude.
The requirement for separate, up to date policy and procedure documents were mentioned several
times (the documents were under development at the time of the interviews). Until they were
available,“ there’s, you know, there’s bits of information that gets sent out to the lenders by PC, on
their emails, just saying watch out for this, or watch out for that”.
Other factors related to credit policy which were highlighted were:
 The loosening of credit policy exceptions
 The Retail credit management meeting held between Product, Group Credit, Head of Retail
 Feedback from the Collections manager (repossessions), group credit, product management, et
In the Unsecured area, the feedback was nearly solely based on perceived changes to the Credit
Scoring model. An indicative comment was: “Credit scores I suppose have changed a bit, sometimes
they’re a little bit stricter, sometimes, then like customers may get approved on a situation where, you
might think, oh that’s gone through, I don’t know about that.” and ““we’re not sort of advised that,
you know that there’s restrictions in place or that, you know, like I mean so there’s nothing, I mean
nothing’s sort of verbalised to say, well I suppose that’s not our area”
In addition, interviewees commented on less formal, intangible factors such as:
 Emphasis was placed on the need to work as a “close team, talk all the time”
 It was highlighted that “what is coming through the door by way of referrals” provides an
indication of all of the loan applications being received
 There was a comment that the “Credit manager said we should “open up”, with the concern
expressed that Credit Officers should not be target driven.
The performance measures also gave an indication as to what was important to Senior Management.
In the Secured area, there were two core measures/benchmarks which covered both volume
(productivity) and the quality of decisions.
In the Unsecured area, the focus clearly was on the number of calls a consultant takes, and how many
calls are converted into a sale. An indicative comment was: “the main thing is the strike rate, where
we hang out for the figures of the strike rate”.

at the moment?”
Overall, there was a perception that credit standards had been lowered. It was reported that there was
a focus on volume versus profit, with no understanding of what profitable business was.
One interviewee commented that the environment was “watchful”, in terms of interest rates,
aggressive builder developers, more rubbish deals, and extensive use of originators. Another
interviewee commented that credit providers generally are “being pushed into doing the loans that are
marginal”, noting that the larger banks are “big enough to be able to survive that sort of thing.”
There was a mixed reaction to the question whether current lending practices were “as bad as the
1980’s excesses”. Arguments against the same problems re-occurring included:
 A benchmark rate is now used to guard against interest rate shock, liabilities, and so on
 Means and measures of looking at income are more sophisticated, for example, using gross
income less tax, taking into account negative gearing, living allowance and overtime policy, etc.
 The Bank is more aware of possible issues, having learnt from the prior period. An indicative
comment relating to inner city apartments was: “Say if the similar situation happened 10 years
ago … they would just go bang and lend against it at a higher rate, now you’re probably a bit more
aware that there could be a possible problem somewhere.”
 The Consumer Credit Code has had a good effect
 The sales force is reasonably sophisticated.
Conversely, the arguments as to why the current lending practices could lead to a situation as bad as
the 1980s included:
 The chasing of market share. Indicative comments include: “now I think we’re in a pre 87 mode,
I believe all banks are obviously trying to maintain their market share. So they’re maybe diluting
their credit requirements so they’ve got to maintain a balance, but obviously for the running
figures, your market share, your bonuses, whatever it is, of course things have been put on you to
change.” and “it only needs a couple of players in the field that, because they’re not getting the
cream of the business, they’ll chase the risky. So it just creates a domino effect.”
 Loss of experienced Senior Credit Managers. An indicative comment was “with the Banks’
program of restructuring or retrenching, .. there’s not many of them around”
 Whilst policies have been put in place to protect against excessive lending, the policies may not be
sufficient. For example, the benchmark rate was argued to be too low because it is driven by the
market as compared to prudential internal standards
 People have borrowed up to the hilt due to the increased availability of credit.

8 Comparison of Individual versus Focus Group interviews in Bank
A (summary)
This Appendix provides a summary of the individual and focus group interviews in Bank A - the only
Bank in which it was necessary to conduct both individual and focus group interviews.
Question: “What drives the credit risk attitude”:
Cards individual vs. Cards focus  Individual: Highlighted the customer focus; Effect of prior
group learning
 Focus group: Branch push sales.
Mortgage individual vs.  Nil report
Mortgage focus groups
Mortgage combined (individual  Cards: Customer focus;; Effect of prior learning;; “Don’t get
and focus groups interviews) vs. a reason, just do it”
Cards combined  Mortgage: Focus on shareholder value
Focus groups combined  Nil report
(Mortgage and Cards) vs.
individual interviews combined
Mentioned in only one of the  Cards focus group: Recession where people just don’t want
four groups (Mortgage focus to lend money
group, Mortgage individual,
Cards focus group, Card
individual)
Question: “How do you know what the credit risk attitude is at a point in time? What are you
meant to do?” and “What actually changes when the credit risk attitude changes”:
Cards individual vs. Cards focus  Individual: Outside things such as media;
group
Mortgage individual vs.  Focus group: Team meeting; your own perceptions and
Mortgage focus groups outside things such as media; Performance management;
quality control
 Individual: More customer focused
Mortgage combined (individual  Cards: Campaign policy (reflects the large, ad hoc
and focus groups interviews) vs. campaigns); emphasis on scorecard, approvals / declinals,
Cards combined hindsighting.
 Mortgage: Feedback from higher credit authority,
interactions on marginal cases, etc.
Focus groups combined  Individual: More customer focused
(Mortgage and Cards) vs.
individual interviews combined
Mentioned in only one of the  Cards individual: Centralised credit with volume focus
four groups  Mortgage focus group: Harassing customers with cross sell
(although Cards did refer to excessive credit being offered to
customers)

Question: “What is the state of the credit risk attitude now?”
 The Mortgage individual and focus groups interviewees were unanimous in arguing that
policies were looser, with a focus on volumes-processed and growing the market share. “We’re
here to write business, not knock it back” was an indicative comment.
 The Cards responses were not unanimous, although the majority of interviewees reported that
policies had eased. The focus group vehemently stated that the focus was on quantity not
quality, speed of processing, and excessive amount of credit offered. The individual interviews
generally stated that policies and practices were less stringent, although one interviewee was at
the opposite end of the spectrum: “We’re not being pressured so we’re being very strict on
them. We’re sticking to policy. So there’s not a lot of flexibility there”.
Question: “The key aspects of credit risk management (relating to both policies and operational
practices) the Bank must have in place to book good quality loan applications include…”:
Cards individual vs. Cards focus  Cards individual: Assessors with sound lending knowledge
group and experience; Data integrity / quality control of
information; Good, accessible managers; Common drivers
between areas ie credit policy, marketing, operations work
together
 Cards focus group: Nil report
Mortgage individual vs.  Mortgage individual: Feed off other areas; Centralisation;
Mortgage focus groups Good, accessible managers; sales and credit work together;
morality – write good business and sleep at night; Assessors
with sound lending knowledge and experience
 Mortgage focus group: Written confirmation in
performance management document whether want credit
quality or quantity; intermediaries
Mortgage combined (individual  Cards combined: Intent of policy / understand big picture;
and focus groups interviews) vs. scoring and automation
Cards combined  Mortgage combined: Branch / retail network accuracy of
information and not take the customers’ side;; additional
security of mortgages changes credit risk profile; end to end
review of loans; referrals up the line
Focus groups combined  Individual interview: Common drivers between areas ie
(Mortgage and Cards) vs. credit policy, marketing, operations work together; good,
individual interviews combined accessible management style; assessors with sound lending
knowledge and experience
 Focus group interview: Nil report
Mentioned in only one of the  Cards individual: Intent of policy and understand the big
four groups picture; Awareness of the credit cycle
 Cards focus group: Nil
 Mortgage individual: Working up through the ranks;
customer satisfaction has decreased; lenders should feel that
they are important assets to the Bank; feedback on loans the
lending officer has written
 Mortgage focus group: Different amount of work if referred
for a higher authority; intermediaries; Customers should be
told what bring in to make an application; Mortgage insurer
and Bank policies align

9 Bank A - Detailed Comparison of Individual versus Focus Group
Interviews
This Appendix provides a more detailed coding of the individual and focus group interviews in Bank A
- the only Bank in which it was necessary to conduct both individual and focus group interviews.
Question: What drives the tightening / easing of credit standards?
Topic area – Bank A Cards Cards Mortg Mortg.

focus 1 on 1 focus 1 on 1
Size of book – need to build 1 4 3 2
Competition, advertising in the market 5 4 2
Campaigns – ie what being advertised at the 2 2 2
time
Branches push sales 1 1
Source driven – campaign, originator pressure 2 1 1
Customer focus by bank 1
Customer attitudes / feedback 2
One stop shop – relationship building 1
Internal factors – policies, management, staff 1
Productivity / increased turnover 2 2 1 2
Hitting collections / bad debt 1 1 2
Recession – losses within the Bank 2
Recession – people just don’t want to borrow 1
money
Learning from last campaign 1
Tax benefits (losses off balance sheet; 1
operating costs on balance sheet)
Monitoring policy by reserve bank 1
Don’t get a reason – just do it 1 1
Lower interest rates 1
Focus on shareholder value 1 1
Business environment (reaction to) 1

Question: What actually changes when the credit risk attitude changes?
Topic area – Bank A Cards Cards Mortg. Mortg.

Reduced # checks, to improve volume flow 1
Approval / declinal rate 1
Justify a decline and not justify an approval 1
Focus on achieving targets 1
Policy changes 2 2
Policy changes for a campaign 1
Interpretation of policy 1
Hindsighting for a campaign 2
More customer focused 1
Point scoring / scoring fields 1
Systems changes 2
Performance management contracts 1
Depends if manager “tough” or “softie” 1
Policy – from collateral focus to servicing 1
focus
Criteria same – emphasis changes 1
Quality control 1
Lending officer’s interactions on marginal 1
cases
Not worried about increasing concentrations 1
eg. particular type of industry
“Harassing customers with cross sell” 1

Question: How do you know what the credit risk attitude is at a point in time? What are you
meant to do?

Team meeting 1 1 1
Management –verbally 1 2 1 2
Your own perceptions – optimistic time or not 1
Your own perceptions as a whole – ie not one 1
specific thing
Outside things eg. media 1
Staff attitude 1
Numbers driven 1 2 1
Campaign policy 1 3
Feel from branches 1 1
Policy rules 2 1 3
# guidelines / checks decreased 2 1
Hindsighting policy 1 2
Manual reviews versus automated 1
Approvals versus declinals 3
Know if scorecard is tight or lenient (product 1 1
being pushed)
Computer system 1 1 1
Centralised credit with volume focus 1
# complaints from customers 1 1 1
Performance management / KRAs 1
See going into re-instatements (ie credit 1 1
problems)
Nothing specific – directive from upstairs 2
“Sense” from management eg “have to have a 1
good reason to decline”
Status of the book - “if the book is good, go 1
for it”
Feedback when account is re-assessed because 1
branch complained
Feedback when have to refer to higher credit 1
authority
Raise up the line when have a query re. policy 3
interpretation from Credit Dept
Feedback from Market (eg media) 1

Subtle changes in rules rather than broad 1 1
policy changes
When the two questions were combined (due to the overlap in responses):

focus 1 on 1 Focus 1 on 1
Team meeting 1 1 1
Management – verbally 1 2 1 2
Your own perceptions – optimistic time or not; 1 1 1
staff attitude; not one specific thing
Outside things eg. media 1 1
Numbers driven; targets 1 2,1 1
Campaign policy 1 3
“Harassing customers with cross sell” 1
Feel from branches 1 1
Policy rules 2 1 3
Not worried about increasing concentrations 1
eg. particular type of industry (part of policy)
# guidelines / checks decreased 1 2 1
Hindsighting policy; Justify a decline and not 1,1 2,1
justify an approval; Manual reviews versus
automated
Approvals versus declinals 1 3
Know if scorecard is tight or lenient (product 1 3 1
being pushed); point score; systems changes
Computer system 1 1 1
Centralised credit with volume focus 1
# complaints from customers 1 1 1
More customer focused;; From collateral 1 1
focus to servicing focus
Performance management / KRAs; should 1 1 1
explicitly state what level of review the
Mortgage Officer should conduct
See going into re-instatements (ie credit 1 1
problems); Status of the book - “if the book is
good, go for it”

Nothing specific – directive from upstairs; 2 1
“Sense” from management eg “have to have a
good reason to decline”
Feedback when have to refer to higher credit 1,1 1,3
authority; Feedback when account is re-
assessed because branch complained; Lending
officer’s interactions on marginal cases;; Raise
up the line when have a query re. policy
interpretation from Credit Dept
Interpretation of policy; subtle changes in 1 1,1 1
rules rather than broad policy changes; Criteria
same – emphasis changes;
Depends if manager “tough” or “softie” 1
Quality control 1
Question: What is the state of the credit risk attitude now?

Looser policies 1
We’re here to write business, not knock it 1
back
Numbers driven – quantity not quality 2
Aggressively chasing market share 2
“We’re not being pressures so we’re being 1
very strict on them. We’re sticking to policy.
So there’s not a lot of flexibility there”
“The Bank’s … got the culture. We want to 2
do the deal all the time, and rather than try and
find they reason for declining it, they’re
finding a reason to approve it. Or help the
loan through”

Question: Will it be as bad as the 1980’s?

More experience now – in 1980s, hadn’t had a 1 1
negative profit experience, high interest rates,
did have sales push
Yes 1 3
Loose policies, but mitigating factors 1 1
Looser policies 2
No 2
Before decentralised, so hard to control 1 1
standardisation. Now is centralised
Bit of both, in terms of tightness of policies 1

Question: “The key aspects of credit risk management (relating to both policies and operational
practices) the Bank must have in place to book good quality loan applications include…”:

Working up through the ranks 1
Perception of the economy/market; reading 1
Discussion between lending areas 11
Referrals up the line 1
# staff to volumes 1
Credit policy 1
Written guidelines 11 1111
Stable and consistent lending policy, decision 1 111
Good policy 1
Stable policy
Information – understand the big picture; 11
intent of policy
Personal training / inherent ability 11
Assessors with sound lending knowledge and 1111
experience
Career path; have specialised; have lost credit 1 111
skills
Training for credit people 111 1 11111
Support / on the job training from co-workers / 111 11
feed off other areas
Enough staff to do the job 1
Education 11
Performance management 11
Branch/retail network – correct data input (ie 1 111
don’t lie)
Branch – training 1 1
Branch – disciplinary action if get wrong 1
Branch – sufficient staff to handle volume of 1
work (given variety of tasks)
Branch – deliberately falsify information 1
Branch (or whoever inputs) should have less 1
than 10% error in data entry, analysis of
information
Compliance testing to determine what is level 1
of data error

Branch – take the customer’s side / save face 1
eg. “There’s a problem too, that I think the
staff believe the customers too much”
Branch – believe what customer tells them
Branches push to write volume not quality 1
Compliance testing what is going into the 1
application (entered by the Branch)
Customers should have indication of what they 1
should bring in to make an application, in
terms of information, to help Branch staff
enter accurate information
All products taken into account (identified via 1 11
system)
Serviceability should reflect all products held 1
with the Bank
Feedback on loans the lending officers have 111
written
Don’t lose credit skills, due to specialisation in 11 11
one area
End-to-end review of application versus “bit 1 111
that rejected by system” ie don’t trust system,
pride in lending decision
Written confirmation, in performance 1
management documents, of whether want
“credit quality” focus or quantity focus (where
apply very strict rules to parts of the
application)
Stable and consistent lending decision 1 1
Different amount of work if doing through 1
system or if has to be referred for a higher
signatory
Consistency between products 1 1
Consistency between lenders 1
Between credit policy and operations 1
Managers should not expect quality of lending 1
decision and quantity (volume) of processing
Customer focus (satisfaction has decreased) 111
Market focus – actively watch for trends 1
Centralisation 1 (bad
thing)

System – check logic of data entry 1 1
System – policies out of date 1 1
System – correct referrals 1
System – out of date generally; not designed 2 1
for the Bank
System – user friendly 1
System that works 11 1
System matches policy 1 11
Scoring and automation 11 111
Scoring for existing customers as well as new 1
accounts
Staff should not go into too much assessment 1
if the system has already approved/declined
Against the above – should be able to override 1
the system when it is glaringly wrong
Boring work because system makes decisions?
Data integrity / quality control of information 1 1 111
Need quality control 1
Communication (particularly of policy 1 1
changes)
2 way communication on policy. Credit 1 11
policy setters should understand impact on
operations
Communication – what’s expected of lending
officers (closer to performance management
contract)
Communication between areas 1
Good management style, accessible 111 1
Support from senior management 1
Sales and credit work together 1
Common drivers between areas eg. credit 11
policy, marketing, operations
Additional security of mortgages changes 1 11
credit risk profile
Morality – write good business (sleep at night) 1 11 1

Intermediaries (originators) controlled eg. 1
“There seems to be a big push out there in the
introducer broker area, where, I suppose that
comes under what Sarina was saying before,
the branch have got branches and targets so
they bring in all these supposed rainmakers
who just haven’t got a clue. I think they’re
doing lending for us, they’re doing
recommendations for Commonwealth Bank,
they have no form of allegiance.”
Mortgage insurer and Bank policies should 1
align
Existing customers 1
Learning from prior campaigns, periods 11
Volume statistics 1
Lenders should feel that they are important 1
assets to the Bank

10 Summary of Responses from Each of the Banks (Individual and
Focus Group Interviews Combined)
This Chapter shows the initial version of the summary of the interviews using the “editing” approach,
followed by a re-calibrated version.
First version of “edited” codes
Category Bank A Bank B Bank C

Focus on profit versus volume; balancing the sales/ x X X
marketing objectives; consistent drivers / integration
between areas
Credit and marketing/credit strategies X X
Clear, consistent policies and procedures/ Policies and x X X
practices support writing good business
Stable and consistent lending decisions x
Credit basics X X
Awareness of the credit cycle; learning lessons x X
Introducer management x X
Sales performance rewards/sales management/well x X X
informed mobile lenders/ Branch interface
Sell the right product X
Customer focus; customer interface; customer x X X
retention versus new sales
Good system x X X
Credit scoring x X X
End to end review of loans x
Mortgage is low risk lending x
Credit authorities X X
Overrides process X
Standardised process X
Quality control/data integrity x X
Tools/empowerment to do the job X
Number of staff; statistics and volume x
Credit staff: Training / experience / demonstrate x X X

sound credit skills / development
Career paths X

Flexible working conditions X
Feedback on lending quality x
Good communication x x X
Performance management X
Support and communication between Lending Officers x
Interaction between Lending Officers and with Senior x

Lending Officers
Staff management x x
Integrity / morality x
Revised version of “edited” codes:

Focus on profit/volume; Balancing the sales/marketing X x X
objectives; credit and marketing strategies; consistent
drivers
Market focus – actively watch for trends; X x X
benchmarking
Awareness of the credit cycle; learning lessons from X X
prior campaigns/periods
Clear, consistent policies and procedures support X x X
writing good business
Intent of policy / understand big picture X x
Stable and consistent lending decisions; Consistency X x
between product areas; all products taken into account
(in serviceability)
Introducer management X x
Sales management / Branch interface / Well informed X x X
mobile lenders
Sales performance rewards, motivation X x X
Sell the right product X
Customer focus; customer interface; customer X x X
retention versus new sales
Good communication X x X
Good system X x X

Credit scoring X x X
End to end review of loans X
Standardised process: Assists consistency, ease of X X
learning but makes less interesting and skilled
Mortgage is low risk lending X
Credit authorities – appropriate, removed if negligent x X
Overrides process X x X
Centralisation X
Data integrity / quality control of information X X
Support and communication between Lending X X
Officers, areas; Interaction between Lending Officers
and with Senior Lending Officers
Tools/empowerment to do the job x
Integrity / morality (sleep at night) X X
Number of staff; statistics and volume X x
Credit staff: Training / experience / demonstrate X x X
sound credit skills / development
Feedback on loans the lending officers have written X x X
Career paths X X
Flexible working conditions X
Performance management / MIS / learn from X x X
experience without punishment
Staff management – supportive, good X X
Get the basics right (ie credit decisioning basics) x X
Consumer credit code. Initially, hard to define “what X
is reasonable” but lenders get better with experience
Processes in place to overcome the lack of relationship X x X
with borrower

11 Edited and Categorised Responses from Each of the Banks,
showing Individual and Focus Group Interviews Separately
This Appendix provides a summary of responses from all Banks, with the responses to the individual
and focus groups within each bank being shown separately.

Dimension Bank A Bank A Bank A Bank A Bank B Bank B Bank C Bank C Bank C
Cards Cards Mor1 Mor Focus 1 Focus 2 Focus Cards Mor
Focus 1on1 Focus 1on1 1on1 1on1
Focus on profit versus volume; Balancing the sales/ marketing 1 1 1

objectives; Credit and marketing strategies
Know what you want in the lending portfolio, and have clear 1
policies to support this
Balanced representation between sales and admin. (credit) 1

through risk policy committee
Sales and marketing interface. Common objectives between 1

sales and servicing “Like we aren’t servicing the same people”.
Sales and servicing need to communicate. Need two way
communication and to think in terms of company profitability
Market focus – actively watch for trends; benchmarking 1 1 1
1
“Mor’ represents Mortgage

Cards Cards Mor Mor Focus 1 Focus 2 Focus Cards Mor
Clear, consistent policies and procedures support writing good 1

business
Good, stable policy 11
Information – understand the big picture; intent of policy 11
Written guidelines 11 111
Policies: clear, comprehensive, precise, not open to 1X2 1X

interpretation, without grey area, which sales force can
understand policies;; “define what policies can be flexible and
which one’s can’t” ie what is a policy and what is a guideline
2
“1X” indicates the item was mentioned many times

Clear, consistent policies and procedures support writing good 1

business – continued
Assess affordability etc 1 1 1
Same policy document, with some exceptions, for all users

Policy must be clear and not ambiguous
Lending manual is an amalgam of policy and procedures,
which need to be separate
Procedure manual to supplement policy manual
Need to be clear, concise, plain English
Need to be user-friendly
Need to accommodate new and experienced lenders

Intent of policy; Understand the big picture 11 1X 1

Stable and consistent lending decisions 1
Consistency between products 1 1
Consistency between lenders (across and up and down) 1 1 1X
Awareness of the credit cycle; Learning lessons from prior 11 1

campaigns/periods
Introducer management 1
Power of introducers ie want to keep them on side. Policy 1 11

looser for introducers – they know how to put up a deal and
how to take one to a higher authority. A direct customer does
not know how to do that
Introducers have ownership of what they do and send in 1
quality applications

Sales management; Branch interface; Well informed mobile 1X 1X

lenders
Correct data input (ie don’t lie), training, disciplinary action if 1X 1X
get wrong, sufficient staff, less than 10% error in data entry
and analysis of info., take the customer side, believe the
customer too much
Customers should have indication of what they bring in to 1
make an application, to help Branch staff enter accurate
information
Sales managers need to tell sales staff what is going on; trained 1 1
sales force
Good system 1
Check logic of data entry; policies out of date ie matches 1X 1X 1X 1X 11 1X 1

policy; correct referrals; out of date generally; not purpose
built for Bank; that works
Good telephone system/process to manage incoming calls, so 1
customers do not have to wait too long: “

Credit scoring
Scoring and automation 11 111
Up to date scorecard which is not reduced to increase the 1

numbers ie. consistent/standardised regardless of loan
application source
Scoring for existing customers as well as new accounts 1
Credit officers have more knowledge of scorecard, so they can 11

advise customer of reasons. Need an indication at least
“More automation of the actual assessment process so that the 1 1
individual credit officers don’t have to know volumes of credit
policies inside and out”;; and credit scoring can lead to be a
better decision
“you’re still going to need some human interaction.” 1

End to end review of loans
End to end review of loans versus bit rejected by system ie 1 111

don’t trust system, pride in lending decision
Don’t lose credit skills due to specialisation in one area 11 11
Written confirmation in performance management documents 1

of quantity versus quality
Managers should not expect quality of lending decision and 1
quantity (volume) of processing
Staff should not go into too much assessment if the system has 1 1
already approved/declined; should be able to override the
system if glaringly wrong
Mortgage is low risk lending 1 11
Additional security of mortgages changes credit risk profile 1 11

Customer focus; Customer interface; Customer retention versus

new sales
Customer focus (satisfaction has decreased) 111
Need to focus on servicing and retaining customers and not 1 1X

just sales. Retention team / activity, with retention staff on
commission with commission based on dollars and not
numbers; enough staff to handle retention; not driven by MIS
(management information systems); time to talk to customers;
cross sell opportunities to increase number of products per
customer;
Eg. “the lender in the field will do the loan and run to the next 11
one, and forget about that particular client. So there’s no
ownership of the particular work that you’re doing. And I
think that if there’s no ownership, there’s no care.”
Sell the right product 1 1X

Good communication
Good communication of policy changes 1 1
2 way on policy; policy setters should understand impact on 1 11 111

operations
Retail credit management meeting is held with Product, Group 1
Credit, Head of Retail
Good communication of what’s expected of lending officers 1
Good communication to overcome specialisation in different 1

department
Credit authorities 1 1
Lenders should lose credit authority if error is sufficiently bad 11

Overrides process
Good process for referrals up the line 1
Different amount of work if doing through system or if has to 1 11

be referred to a higher authority. ie Don’t think this is
representative of the loan population
“We have to refer it to retail lending and they have a look at it.
They virtually go through the loans with a fine tooth comb,
whereas in direct, we’re just basically checking the phone
number is correct.” … “With the declines as well, I’ve found
that some consultants just decline it.”
“some of the credit officers have got into the habit of thinking 1
if I don’t sign the loan, somebody higher will” ie Consistency
across all areas and upwards. If referred above, get the same
answer
Standardised process assists consistency and ease of learning 1
Data integrity; Quality control of information 1 1 1111
Compliance testing what is going into the application (Branch) 1
Auto-decisioning requires good data to be input 1
QA, hindsighting (not to approve, but retrospective QA) 1

Tools/empowerment to do the job 11
PC, computer access, CRAA access 1
Number of staff; Statistics and volume
Need enough time, staff to do the job properly; # staff to 11 11

volumes
Volume statistics 1 11
Sales performance rewards and motivation
Branches forced to write volume not quality 1
Sales not too dependent on high commissions; commission 11 1 11

structure should not encourage sale of wrong product
Need to have good ethics 1

Credit staff: Training / experience / demonstrate sound credit skills

/ development
Personal training / inherent ability 11
Assessors with sound lending knowledge and experience 1111
Career paths 111
Training for credit people 111 1 11111 11 11
Education requirements 11
Perception of the economy/market 1
Specialisation means have lost credit skills 1
Feedback on loans the lending officers have written 111 1 1
Career paths
working up through the ranks 1
Should be available 1
Flexible working conditions 1X

Performance management 11
Feedback on loans the lending officers have written 111
Lenders should feel they are important assets to the Bank 1 1
Staff “who want to care”;; performance measurement and 1

reward structure; reward cross sell; simple little bits of
recognition’ “want to feel important ie be recognised”;;
performance management is a farce; compensation to match
performance rankings
Targets, small awards, regular MIS 1 111 11
Credit Officers should be able to learn from experience 1 1 1

without punishment
Integrity / morality (sleep at night) 1 11 1
Personal pride: “Because you just have this loyalty to the 1
Bank, well I do, I wouldn’t want to just make a sale and know
that that money was going to be spent and never repaid.”

Support and communication between Lending Officers and areas
Support / on the job training from co-workers / feed off other 111 11
areas
Need good communication between field staff, credit officers 1
and Group credit
Need good communication between between areas eg. sales 1 111
and credit
Interaction between Lending Officers and with Senior Lending
Officers
Discussion between lending areas 11
Consistency between credit policy and operations 1
Staff management – supportive, good 1111 1
Good communication with Team Leaders 1
Consistent drivers / integration between areas 11
Sales and credit work together 1
Existing customers 1

Consistency between product areas; all products taken into 1 1 11 11

account (in serviceability)
Centralisation is a negative 1
Mortgage insurer and Bank policies should align 1
If deals are marginal, just reject them 1
Get the (credit decisioning) basics right 1 1
Respect the basics eg. serviceability calculations are not 1

predictive of problem loans
Bottom line is common sense 1
Consumer credit code: Initially, hard to define “what is 1

reasonable” but lenders get better with experience

Processes in place to overcome the lack of relationship with

borrower. Representative comments drawn from various
interviews include:
A good client interview process to extract appropriate

information. Computer has broken down the information
exchange, so is efficient and timely turnaround, but still need
to get the full information the first time around
A means to maintain contact with customer: “previously there
was a real relationship with the customer, and with that dying,
I guess you need some sort of quality credit culture. You need
to maintain your contact with the customer. I mean for
sensible reasons really” (eg. for increased sales)
A means to identify problems early: “And you also built up a
lot of relationships, I mean that was the key thing, I mean you
got people who would speak to you if they were in strife,
whereas now, they don’t speak to you, they hide… They’ll
delay coming to you before they give you the problem,
whereas there you could see it, and you could tackle it and
maybe overt it”
“sometimes I think am I old fashioned or what. Whereas
people used to have some form of rapport with the person that
they were talking too. They’d have one person that they dealt
with, in terms of Banking, whether it’s lending, or discussing
finance with them”


12 Issues Particularly Pertinent to Individual Banks
This Appendix provides a summary of the issues which appeared key to one bank only.
End-to-end review of loans (Bank A Secured). The issue reflects the concern the Mortgage Lenders
have with what they perceive to be the de-skilling of their job, with the increased usage of decision
trees and scorecards. The finding reflects the comparatively recent move towards automation the
Secured area in Bank A. The issue has been raised in Bank A Unsecured also, though not as
vehemently. Indicative comments include:
 “I could not leave this centre tomorrow to take a transfer or to leave (the Bank) and say that I
have got good credit skills. I had good credit skills before I came here, and this is just probably a
result of automation, I think that now I’ve just fallen into the slot that (the Bank) wants me to sit in,
and from there you just don’t deviate too much. So it’s a bit battery hennish in that regard.”
A key point is that (in the Lending Officers’ opinion) Bank A have not made explicit what is required
of the Lending Officers. The Lending Officers are concerned that they will be “punished” if they
complete the loan analysis using the new process and a bad decision was the outcome, as compared to
the way the Lenders thought they should lend associated with a “good” decision. Lending Officers
also appeared reluctant to cease undertaking what they think is an adequate level of loan review, on
the basis of professional pride.
The end-to-end review of loans has not been identified as issue in the other Banks, possibly because:
 Bank B has previously gone through the standardisation process a number of years prior to the
interviews. Lending Officers had either adapted to the new process or left the Bank (with
extensive redundancies having being made by the Bank)
 In Bank C, the researcher talked with the group of Lending Officers who are still conducting a full
review of the loan applications.
Tools/empowerment to do the job (Bank B Secured/Unsecured). The issue is highly associated with
very basic infrastructural issues such as the access to personal computers, stationery and, a direct
credit reference link. It appears that the Bank has ceased spending on the infrastructural items due to a
significant focus on cost and impending outsourcing of a large proportion of the lending function.
The other “big ideas” to result from the Bank B inlcude:

128
 The under-servicing of existing customers: “Service and sales are different issues. What we do at
the moment is purely turnaround.”
 The role of Mortgage originators: “The introducers run the bank ...5 years ago we weren’t so
highly dependent on those introducers and brokers, but now we are. And there’s the big
difference. And it has a major impact on what the current culture is.”
Sell the right product (Bank C Secured). The issue appears to be a function of the behaviour of
mobile lenders who are compensated on the volume of sales rather than necessarily providing
customers with the most appropriate product. It is reported that the revolving credit products are being
sold to customers as they were “easy” to sell, rather than matching the customers needs. The issue is
highly associated with the Branch performance measurement category, as it relates to mobile lenders
receiving the appropriate compensation and having a customer focus.
The issue is particularly likely to be an issue with Bank C as:

 The revolving credit product is a reasonably recent product launch
 The product is being sold through a relatively new channel (mobile lenders) which lenders were
very critical of
 The Bank has a reputation of being very focused on meeting customer requirements.
It is not likely that this will be an issue for Bank B, as the product in question has been sold for a long
time. It is not likely to be an issue in Bank A as the product is not a major component of sales.
However, the role of Branch staff in introducing loans to the Banks was a major issue raised by all
Banks.
Flexible working conditions (Bank C Unsecured). Flexible working conditions have been raised as a
very positive feature of Bank C’s unsecured operations (where comparatively low-skilled staff can
work non-standard hours). However, the emergence of this item in Bank C alone probably is a sample
artifact – the sample was comprised primarily of permanent part-timers who work flexible hours.
Where the interviewee was a full-timer within Bank C, the issue has not been raised.

13 Comparison of the Notes that were Jotted Down but Not Raised in
the Interviews
This Appendix highlights issues which were jotted down on the Lending Officer interviewee’s
information sheets (refer Appendix 1.8),but not raised in the subsequent interview.
What drives the tightening Bank A

/ easing of credit - Centralised departments
standards? - Well balanced portfolio
Bank B
- More than one person evaluating and signing off on
particular deals
Bank C
- Nil report
Quality credit process Bank A

- Common sense
- Up-to-date information on consumer trends and competitor
practices
- Relevant equipment
Bank B
- Support from senior management
- Common sense
Bank C
- Checking of portfolio historical data to see whether policies
are good / bad / irrelevant
- Things do go wrong – not everybody tells the truth

Bibliography and Appendices: Appendix 13 and 14 Page 129
14 Data sources for Empirical Evidence of Credit Rationing
This Appendix shows the various sources of data which were considered in the attempt to find
empirical evidence of credit rationing.
Tightening/easing of credit policies

The feasibility of examining the number of credit policies tightened versus loosened in a given
organisation in a given time span was considered. Whilst the approach could provide a comparatively
objective measure of the credit risk attitude, this did not appear to be a viable option as:
 Banks were reluctant to share this level of very detailed information
 The credit policies might not change, but their interpretation and application at the operational
level could vary widely
 Changes in credit policies were not necessarily well documented within FIs; The approval rate was
highly associated with the quality of the applications (and might not reflect a change in the risk
appetite)
 The FIs had different definitions of the variables, such as “retail” versus “small business”.
Review of loan applications

Another option considered was a review by the researcher of loan applications approved by an FI,
leading to personal judgement on whether credit officers were being more or less generous in their
credit decisions. However:
 The information was difficult to access, with FIs being reluctant both to share the information and
assign resources to gathering the information
 The approach was still subjective; There was limited variation in loan structure and conditions
within retail portfolios, which made it more difficult to isolate differences in lending standards
 A high proportion of credit decisions were made automatically through application credit scoring
systems
 The sample period was relatively short.
 It was not possible to examine the reasons behind the changes, in terms of the Lending Officers’
judgement / perceptions.
Bibliography
Bibliographyand
andAppendices:
Appendices:Appendix
Appendix1314and 14 Page 130
Page 130
Level of provisioning
The levels of loan provisions held appeared to be an option for tracking the inherent credit risk in the
portfolio, as provisions were designed to reflect the likely charge to the FI from bad debt. However,
the movement in loan provisioning was not feasible given:
 The lack of a common definition, model or methodology for allocating loan provisions
 Some FIs had considerably more sophisticated, and presumably more accurate, methodologies
than other Fis
 FIs had a different tolerance for risk when assigning provisions
 Reserves the FI had set aside previously for loans affect provisioning movement and expectations
of the provisioning
 Introduction of economic loss (dynamic) provisioning in recent years meant that provisions held
did not necessarily reflect the current portfolio quality
 The drive for bottom-line profit in a given year affected the pressure to increase or lower
provisioning differentially for different organisations.

Bibliography and Appendices: Appendix 13 and 14 Page 131
15 Issues Emerging from the Senior Credit Manager and Lending
Officer Interviews (Combined)
This Appendix summarises the key issues to emerge across the Senior Manager and Lending Officer
Interviews (excluding the literature review), in terms of the “old chestnuts” versus emerging issues.
The “old chestnuts” fell into two main categories: The setting / communicating of credit objectives
and the lending process.
Credit Balanced and consistent credit/marketing objectives are required.

objectives “Volume for volume’s sake” never works. However, we repeat the same
mistakes again and again.
FIs should “stick with their knitting”, and not be dragged into lending
portfolios and standards which are beyond their long term risk appetite by
the less informed competitors.
Short termism can drive sub-optimisation with a focus on short-term

volume growth and cost cutting versus long-term credit losses. A concise
response to the question as to what drove the credit risk attitude was
“Greed”.
Performance management systems should measure and reward the

behaviours required to achieve organisation-wide objectives.
Pricing should reflect risk, to the extent possible with existing information
and systems.
Credit standards should be actively managed through:

- Awareness of market factors with competitor benchmarking of
trends (but not blindly following the pack)
- Counter-cyclical or, at the very least, consistent lending.
Senior Credit Managers should actively monitor and manage the “credit
culture”, ensuring that they understand how the credit risk attitude is
interpreted and put into practice throughout the organisation.
Good communication should be used to manage both the formal and the
informal communication mechanisms.
All members of the credit organisation should be told the intent of credit
policies and understand the “big picture”.

The credit An appropriate credit infrastructure should support Lending Officers in
basics doing their job, including:
- Good, solid, consistent lending policies and procedures
- Good systems
- Credit authorities and practices at an appropriate level of
empowerment
- There is segregation of duties. Single credit signatories are not
allowed
- Inappropriate use of credit authorities resulting in disciplinary
actions. However, Lending Officers should be able to learn from
experience without fear of punishment
- Exceptions (overrides) being managed carefully
- Policies and practices reflecting the current legislation
- Acknowledgment that most borrowers who default are “unlucky”
for the same reasons (unemployment/bankruptcy, illness, marital
breakup)
- The need to “protect” borrowers from themselves” in that they
don’t plan ahead and are not aware of the repayments they can
afford.
Organisation and staffing should provide:

- Good, supportive, accessible managers
- Staff who are experienced, trained and capable in making lending
decisions
- Feedback to staff on the credit quality of their portfolio, including
the credit performance of their lending portfolios
- Comprehensive performance management plans for staff
- Clearly defined career paths for staff.
- A sufficient number of capable staff to handle the volumes.
Common sense should prevail in all lending-related decisions.
Managers should not assume they know what the Lending Officers’
interpretation of the credit culture is. A small difference in interpretation
and / or implementation of the relatively intangible construct of credit
culture can have a significant effect on portfolio quality.
Lending Officers should be comfortable that Bank policies are prudential

(and borrowers are not overcommitted) so that the Lending Officers can
“sleep at night”.

Some of the emerging/prominent issues through the 1990s are shown below.
Information Information is one of the most critical components of a portfolio-based

approach. The data and analytics should support the constant testing and
improvement of policy and practice.
Functional The level of centralisation needs to be carefully managed. Both
specialisation centralised and decentralised models can work - they just have their own
management requirements.
Changed Strong management of the new distribution channels (mobile lenders,
marketing Branch staff, and Introducers) is required. The right product should be
model and sold to the customer, regardless of source or commission structure.
accountabilities
The transition to line of business ownership of credit, where applicable,
should be supported by:
- Clearly defined accountabilities between the business unit and the
centralised credit function
- Experienced credit staff in the centralised group risk function and
the decentralised lines of business.
Communication The formal and informal communication mechanisms should be carefully
between units managed to ensure an end-to-end feedback loop exists between the
functionally specialised units.
Organisational Organisational learning becomes more important as a result of the
learning turnover of credit staff and changing roles.
Cost cutting The pressure on lending margins can lead to cost-cutting at the expense
of:
- Credit standards
- Levels of experienced, trained and capable lending staff
- Future business development opportunities.
Controls When changing to a portfolio-based approach, it is necessary to
implement a totally new system of controls in conjunction with the
improved information. Controls should be increased to offset the effects
of automation, functional specialisation, empowerment and cost-cutting
initiatives. Credit risk is an ecosystem – if lending standards or practices
are eased in one area, a compensating control should be established
elsewhere.
Systems Decision support systems and workflow management systems for
portfolio quality and operational effectiveness are critical. The effect on
the job experience and experience for credit risk staff should be carefully
managed
Credit Senior Credit Managers should provide a clear picture of the credit
strategies strategy driving the use of the methodologies and ensure the strategic
direction is encapsulated in policies and practices. Care must be taken to
get the strategy right, or the errors will be systemic.
It is not possible to depend on the Lending Officer’s common sense in the
origination process as: A large proportion of the decisions are embedded
in the decision support system; Lending Officers will, on average, be less
experienced and skilled; and, functional specialisation means Lending
Officers do not see the end-to-end process.

Portfolio The external environment and the internal policies / practices which drive
management portfolio quality should be monitored and incorporated into decision
making in the un-ending balancing between the short-term revenue
growth and cost reduction objectives and the longer term credit losses.
Risk-based pricing should reflect the customer life-cycle profitability.

The information is required to both establish the pricing centrally and
communicate the information to all of the relevant customer “touch
points” throughout the organisation.
Credit scoring models should be established, maintained well and

understood by staff.
Provisioning methodologies and capital allocation should be carefully

managed. Profit models for each portfolio segments should reflect
differential treatment.
FIs need to increase the level of sophistication and hence have confidence
in their measures of portfolio quality. The following techniques were
seen to be important:
- Enhancing risk / reward performance measurement tools (eg.
RAROC, risk grading systems) and portfolio monitoring capability
- Credit trading / derivative capabilities
- Reduction in absolute risk concentrations (ie diversification).
Changed staff Staff expectations and skills should reflect the lower skill-base required
roles and (on average). The issue is particularly important where existing more
performance highly and multi-skilled staff are asked to do less skilled and varied tasks.
management However, sufficient highly experienced and capable credit staff should be
retained to review the complex loan applications and establish the rules
which are embedded in work processes.
Flexible working hours should be encouraged, to

- Meet the customers’ expected turnaround times
- Offer credit staff flexible working conditions
- Maximise contact rates when the FIs attempt to contact customers
(for example, in Collections operations).
Customer A focus on operating efficiencies can lead to relationship breakdowns.
relationship The lack of face-to-face contact should be offset by other benefits (such
as lower price or ease of access by phone or electronic mechanisms).
Existing relationships should be treated favourably to aid retention, rather

than focusing on building new business only (in terms of pricing and
credit standards).
Customer relationship pricing should be instituted.

Responsiveness Responsiveness within the FI to changing market and other external
conditions is imperative.
Responsiveness to customers is important in association with extensive

disintermediation and the traditional relationship between bank and
customer breaking down.

Economic and Borrowers have a changed response to repayment responsibilities,
borrower reflected in increased incidence in bankruptcy in a relatively benign part
factors of the credit cycle.
The considerably higher level of personal debt that consumers are

carrying means that assumptions derived from historical trends may not
apply in the downturn of this economic cycle.
The effect of managing finances in an environment of low inflation and

interest rates will have to be incorporated, in terms of both the FIs ability
to on-sell security on problem loans and the customers ability to manage
their finances.
The high usage of mortgage insurers may change the dynamics of the
retailed secured lending portfolios.
Alignment of Senior Credit Managers should be aware that the applications they are
credit culture, seeing (which are referred for a higher credit signatory) are not
risk attitude, necessarily reflective of all applications. As noted by a Lending Officer
climate and of a referred application: “We have to refer it to retail lending and they
infrastructure have a look at it. They virtually go through the loans with a fine tooth
comb, whereas in direct, we’re just basically checking the phone number
is correct.”
Further, if Senior Management are (sub)consciously relaxing standards,

the Lending Officers will perceive the relaxation of standards. It is
possible that the effect will be doubled, as the Lending Officers apply
more liberal interpretations of the already relaxed standards.
The importance of the congruence between the Senior Credit Managers’
intentions and the Lending Officers’ perceptions was highlighted by
disparity of responses in the Credit Confidence Survey (Senior Managers)
and Interviews (Lending Officers). In addition, it was reported in the
Senior Credit Manager interviews that all or most of the other banks were
moving into disaster myopia stage, although none of the Banks reported
themselves as having lowered standards.
Changed There has been a fundamental change to the performance expectations of
expectations of credit risk managers. No longer does “conservative” loss minimisation
credit risk equal good performance. Credit risk managers are expected to work to
management optimise long-term profitability, with improved information and analysis
providing the basis of common objectives

16 Credit Confidence Survey Questionnaire & Covering (2) Letters
This Appendix provides a copy of the Questionnaire sent to the FIs, along with the covering letters
for (i) the top 9 Banks and (ii) the medium sized FIs.

Sample covering letter to be forwarded to “top 9” banks
xxxxxxx Our ref RM98sCredConflna-02311.doc

xxxxxxxx
xxxxxxxx Contact Jenny Fagg
xxxxxxxx
Your ref
Dear xxxxxxx
Credit
0 XXXX confidence
0000 survey
Over the last 12 to 18 months, we have seen considerable swings in perception concerning
the availability and the pricing of credit. Not long ago, regulators in both Australia and the
United States voiced concerns about falling credit standards and pricing not reflecting risk.
More recently, there has been reporting of concerns about a “credit crunch” in overseas
markets, although several leading bankers have said there is no evidence of this occurring
in Australia.
KPMG has developed a Credit Confidence Survey to obtain a definitive measure of the
tightening - or otherwise - of credit standards in major segments of the Australian domestic
markets. The Survey is being sent to a Senior Credit Officer in each major Australian
lending institution.
Results of the Credit Confidence Survey will be forwarded to financial institutions which
have responded to the Survey. In addition, respondents will be invited to attend a Credit
Manager’s forum to discuss the key trends and issues associated with credit risk and its
management.
The Credit Confidence Survey incorporates all lending portfolios. It has been adapted from
a survey conducted in the United States by the Federal Reserve, namely the “Senior
Lending Officers Opinion Survey”. The Credit Confidence Survey is comprised primarily
of subjective or interpretive responses which require little analysis of financial information.
In addition, there is one table of key credit performance measures.

We envisage that the Credit Confidence Survey will be issued once or twice a year to
enable the measurement of credit standards across the business cycle. However, the
frequency will depend on the interest that financial institutions demonstrate in the Survey.
The responses to the Credit Confidence Survey will remain confidential to KPMG. Only
aggregated data will be reported. If there is any chance of a financial institution being
identified, the results will not be reported. We shall be pleased to discuss your response
prior to any publication of aggregated results.
We would greatly appreciate it if you would take the time to complete the Credit
Confidence Survey. With your assistance, we can build the consistent, reliable and
comprehensive benchmarks which will provide useful information for market participants.
Could you please return the completed Survey by December 20, 1998. We will contact you
next week, to arrange a meeting for us to assist you or a colleague in completing the
Survey.
If you have any questions relating to the Credit Confidence Survey, please contact
Jenny Fagg, KPMG Credit Risk Management:
Telephone: 03 9288 6760 or 0417 571 201

Email: jfagg@kpmg.com.au.
Fax: 03 9288 5977.
Yours faithfully
xxxxxxx
Partner
Enclosure

Sample covering letter to be forwarded to
“medium sized” banks
«Title» «FirstName» «LastName» Our ref RM98sCredConfInbb-O0412.doc

«JobTitle»
«Company» Contact Jenny Fagg
«Address»
«Suburb» «State» «PostalCode»
Your ref
00 xxxxxxxx 0000
Dear «Title» «LastName»
Credit confidence survey
Over the last 12 to 18 months, we have seen considerable swings in perception concerning
the availability and the pricing of credit. Not long ago, regulators in both Australia and the
United States voiced concerns about falling credit standards and pricing not reflecting risk.
More recently, there has been reporting of concerns about a “credit crunch” in overseas
markets, although several leading bankers have said there is no evidence of this occurring
in Australia.
KPMG has developed a Credit Confidence Survey to obtain a definitive measure of the
tightening - or otherwise - of credit standards in major segments of the Australian domestic
markets. The Survey is being sent to a Senior Credit Officer in each major Australian
lending institution.
Results of the Credit Confidence Survey will be forwarded to financial institutions which
have responded to the Survey. In addition, respondents will be invited to attend a Credit
Manager’s forum to discuss the key trends and issues associated with credit risk and its
management.
The Credit Confidence Survey incorporates all lending portfolios. It has been adapted from
a survey conducted in the United States by the Federal Reserve, namely the “Senior
Lending Officers Opinion Survey”. The Credit Confidence Survey is comprised primarily
of subjective or interpretive responses which require little analysis of financial information.
In addition, there is one table of key credit performance measures.
We envisage that the Credit Confidence Survey will be issued once or twice a year to
enable the measurement of credit standards across the business cycle. However, the
frequency will depend on the interest that financial institutions demonstrate in the Survey.
The responses to the Credit Confidence Survey will remain confidential to KPMG. Only
aggregated data will be reported. If there is any chance of a financial institution being
identified, the results will not be reported.

We would greatly appreciate it if you would take the time to complete the Credit
Confidence Survey. With your assistance, we can build the consistent, reliable and
comprehensive benchmarks which will provide useful information for market participants.
Could you please return the completed Survey by January 22, 1998.
If you have any questions relating to the Credit Confidence Survey, please contact
Jenny Fagg, KPMG Credit Risk Management:
Telephone: 03 9288 6760 or 0417 571 201

Email: jfagg@kpmg.com.au.
Fax: 03 9288 5977
Yours faithfully
xxxxxxxx
Partner
Enclosure

Bibliography and Appendices: Appendix 16 Page 149a
17 Credit Confidence Survey Report
A copy of the complete Credit Confidence Survey report follows.

18 Credit Confidence Survey – Letter from KPMG Regarding
Authorship


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Managing the Credit Risk Attitude

in Australian Retail Banks

Bibliography and Appendices

Thesis submitted in partial fulfilment of conditions for award of

PhD at University of Sydney

1 Advantages of individual vs. focus group interviews 28

2 Copy of credit rationing literature shown to interviewees 33

3 Copy of interviewee guide for Senior Credit Managers 35

4 Graphical models shown to Senior Credit Managers 37

5 A detailed review of the issues raised by Senior Credit Managers 43

6 Copy of interview guide used for Lending Officers 64

7 Responses sent to each of the Banks after Lending Officer interviews 68

8 Comparison of individual versus focus group interviews in Bank A 95

9 Bank A - Detailed Comparison of individual versus focus group 97

10 Summary of responses from Banks A, B and C (individual and focus 107

12 Issues particularly pertinent to individual banks 127

Bibliography and Appendices: Table of Contents Page ii

17 Credit Confidence Survey report 154

18 Credit Confidence Survey – letter from KPMG regarding authorship 188

Bibliography and Appendices: Table of Contents Page iii

Abbey A, Dickson, JW (1983)

Akerlof GA and Dickens WT (1982)

Allaire Y and Firsirotu E (1984)

Allen F and Gale D (1994)

Atkinson JA and Gubrium (1994)

Atkinson and Hammersley (1994)

Australian Bankers Association (1999)

Bibliography and Appendices: Bibliography Page 1

Australian Financial Review (1997)

Australian Financial Review (1997)

Australian Financial Review (1995)

Australian Financial Review (1995)

Avery RB and Elliehausen GE (1986)

Azariadas C and Smith B (1998)

Azariadas C and Smith B (1999)

Baker DD, Ravichandran R and Randall D (1989)

Barr Taylor A & McWhorter, RP (1992)

Barrickman J and McKinley J (1994)

Bencivenga VR & Smith B (1992)

Bibliography and Appendices: Bibliography Page 2

Berger AN and Udell GF (1992)

Besanko D and Thakor A (1987)

Blundell-Wignall A and Gizycki M (1994)

Boot AW and Thakor AV (1994)

Boot AW, Thakor AV and Udell GF (1991)

Bose N and Cothren R (1997)

Bibliography and Appendices: Bibliography Page 3

Brown PJ and Hennesy RE (1998)

Bushby W and Robbins-Jones TJ (1989)

Campbell J, Dunnette MD, Lawler EE and Weick KE (1970)

Cassell C and Symon G (1994)

Chen MJ and Miller D (1994)

Bibliography and Appendices: Bibliography Page 4

Collins TR and Raeber T

Collis DJ and Montgomery CA (1995)

Cooke RA and Rousseau DM (1988 )

Crabtree BF and Miller WL (1992)

Credit Reference Association of Australia (1995)

CSFI - Centre for the Study of Financial Innovation (1998)

Cyert RM and March JG (1965)

Dand D and Shanmugan B (1993)

Data Advantage (2000)