FDIC Considers Features Of Strong Credit Risk Grading Systems

In the latest issue of Supervisory Insights, the FDIC Division of Risk Management Supervision ("DRMS") provided "illustrat[ions]" of "strong credit grading systems that incorporate clearly identifiable processes and a sound governance framework."

The article, "Credit Risk Grading Systems: Observations from a Horizontal Assessment," was drawn from examiner observations about the loan risk grading systems at certain state nonmember banks. The DRMS found that:

• smaller institutions used "expert judgment"-based systems, in which a loan officer or relationship manager gives a grade based on his or her knowledge of the credit;
• as banks grew bigger, management would switch from an expert judgment-based system to a quantitative scorecard or modeled approach consisting of qualitative adjustments;