1. RECONSIDERATION OF THE BANK CREDIT ASSESSMENTS: THEORETICAL AND PRACTICAL ISSUES Alexander Rad, Olof Wahlberg, Peter Öhman and Einar Häckner Paper presented at the ERES 2009 Conference, Stockholm June 24-27 2009

2. 2 A Research program Bank risk management – what is best practice? A SME loan assessment study – ”the study” focusing on Lending Officers (”LO”s) assessments of loan applications from Small/Medium Sized Enterprises (”SME”s) Research question for the study: How does a LO arrive at a summary conclusion on an individual SME loan application evaluation?

3. 3 Purposes of the paper to... briefly outline the theoretical frame of reference for the research program and for the study to identify information useful for bank credit assessments discuss methods for the study report on pilot testing of methods and assess their feasibility

4. 4 Theoretical frame of reference 1.Theories on banking and finance 2.Accountability theory 3.Cognitive theory 4.Institutional theory and structuration theory 5.Sense-making theory

5. 5 Credit assessment criteria A. Industry risk B. Business concept C. Financial statements D. Anticipated financial standing (budgets, cash flows) E. Company documents (reliable, verified etc.) F. Management and board G. Client’s record H. Market conditions I. Collaterals J. The bank’s loss risk K. The bank’s earning opportunities

6. 6 The Repertory Grid Approach Based on Personal Construct Theory (Kelly, 1955) We see “the world” as bipolar constructs e.g. “Easy to assess – Difficult to assess” Classes of phenomena in “the world” are called “elements” e.g. “Application cases”, “LOs”, “banks” or “clients” Constructs are used as Likert scales to score elements The output is a matrix (grid) with the scores for each element on each construct The data captured can be analyzed e.g. by Principal Component (Factor) Analysis or Cluster Analysis

7. 7 Constructs for pilot study 3 1. Easy (1) – difficult (7) to assess 2. Small (1) – large (7) influence by Basel agreements 3. Small (1) – large (7) impact on first time applicant (new client) 4. Requires future-orientated assessments to a small (1) – large (7) extent 5. Predominantly quantitative (1) – qualitative (7) information 6. Requires little (1) – much (7) time to assess 7. Little (1) – much (7) oral information 8. Predominantly objective (1) – subjective (7) assessments 9. Requires little (1) – much (1) second opinions 10. Small (1) – large (7) impact on recurring applicant (existing client) 11. Little (1) – much (7) relationship dependent 12. Small (1) – large (7) influence by the lending strategy of the bank 13. Requires little (1) – much (1) intuition 14. Small (1) – large (7) aid from decision supporting systems

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10. 10 Repertory Grid Plot - PCA Analysis Management/board F Much relationship dep 11 11 Little relationship dep Much intuition 13 I Collaterals Little intuition 13

11. 11 Repertory Grid Plot Varimax Rotated PCA Analysis – Component 1 Much relationship dep 11 Management/board F Much intuition 13 Subjective assessment 8 Qualitative information 5 Much oral information 7 Little impact for 2nd time applicant 10 10 Large imp 2nd time applicant I Collaterals 7 Little oral information 5 Quantitave information 8 Objective assessment 13 Little intuition 11 Little relationship dep Relationship Transac- tion

12. 12 Repertory Grid Plot Varimax Rotated PCA Analysis – Component 2 4 Much future orientation K Bank’s earning opportunity Large support system 14 Anticipated fin standing D Much time consuming 6 Little future orientation 4 Industry Risk A 14 Small support system 6 Little time consuming Relationship Transac- tion Future-oriented assessments Historically based assessments

13. 13 Repertory Grid Plot Varimax Rotated PCA Analysis 4 Much future orientation K Bank’s earning opportunity Large support system 14 Anticipated fin standing D Much time consuming 6 Little future orientation 4 Industry Risk A 14 Small support system 6 Littel time consuming Much relationship dep 11 Management/board F Much intuition 13 Subjective assessment 8 Qualitative information 5 Much oral information 7 Little impact for 2nd time applicant 10 10 Large imp 2nd time applicant I Collaterals 7 Little oral information 5 Quantitave information 8 Objective assessment 13 Little intuition 11 Little relationship dep Relationship Transac- tion Future-oriented assessments Historically based assessments

14. 14 Contacts *Mid Sweden University Department of Social Sciences, 851 70 Sundsvall, Sweden Authors: Alexander.Rad@miun.se  CorrespondingAlexander.Rad@miun.se Olof.Wahlberg@miun.se Peter.Ohman@miun.se Einar.Hackner@miun.se