Credit Risk Management Oklahoma State Thesis

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Other than the branch expansion there has been no significant change in their financial structuring. The future does not hold much along these lines as shown in the future projections. Other than conservatively adding lease financing as an option their growth is limited. Past figures from Federal Financial Institutions Examination Council (FFIEC).

However with the possible income gain from selling either their branch of a line of loans they may be able to further expand their existing loan base into larger corporate agribusiness financing. Out of any pool of assets a bank has the option of lending or investing the money. Lending does has a number of advantages both economically a socially: The act of lending usually increases the economic strength of the community, promoting the growth of the community and the bank. Lending also typically creates more deposits at the originating institution because the borrower usually receives an account from the lender along with the loan.

Furthermore, there are some adverse effects as well: Lending is a labor-intensive process and can certainly raise back-office and other overhead costs. It also requires an elaborate staff, floor space, and equipment. But paramount among all these is that lending is risk intensive. High lending can expose banks to credit losses and related higher expenses. (Holdren)

With stricter credit policies and better credit management Oklahoma State Bank can create a high quality loan portfolio which may not require a higher allowances for loan losses. By reducing these losses banks have the capacity to earn up to 50% higher ROA's than similar institutions with larger but less well managed portfolios.

The possibility of expanding into the e-mortgage business is another viable alternative for Oklahoma state banks. As evidenced by the demographics the local environment is not conducive to more expansion.

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However, by bereaving into internet banking and expanding the loan base, Oklahoma state bank could certainly increase it income streams. However, stringent credit polices must be kept in place as they are now. Strict adherence to valid documentation, using reliable estimators in the filed and other resources are necessary to maintain a high quality credit portfolio.

Greg Smith, vice president and general manager, with Xerox Mortgage Services, Atlanta, agrees that some big banks that have recently suffered from the sub-prime mortgage fiasco have bigger problems right now than revamping their loan processing, but that may begin to change.

"We have a system that many banks are signing up with that supports true end-to-end electronic processing," says Smith. "Regional community banks that are well diversified and take a responsible approach to credit risk management will be in the best position to take advantage of such a system to gain new efficiencies." (Bielski)

The recommendations for the bank is a precise formulation of a credit policy, establish a credit risk rating for their customers, and to also set up several different levels of delegation of authority for the credit approval depending upon the type of business and/or the size of the credit line. Loan approval in general should considers the purpose of the loan as well as assessing the ability of the applicant to repay the loan. This should take into account the applicant's operating analysis, the business feasibility of the company and a thorough knowledge of the capability of the management team. They also need a failure plan to consider. The Bank should also perform credit reviews, which include reviewing credit risk rating levels on a regular basis.

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