Loan review has become a mainstay third line of defense for loan portfolio risk management in financial institutions of all sizes and complexities. Loan review has also taken on increased significance as it is used both to ensure appropriate credit grading and to assist in the determination of loan loss allowance. Regulators often assess an institution’s loan review program in reviewing the appropriateness of the loan loss allowance.
The increased visibility of loan review has led to greater expectations for financial institutions to have a sound loan review program. Loan portfolio composition can vary widely between community based financial institutions with different risk factors to consider. The number of factors that impact the loan portfolio may challenge management in their determination of how to best define the loan review process. Fortunately, there is more than one right approach to a loan review program.
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