Why we need professional bankers now more than ever
By Steve Pateman, Institute Vice-President Steve Pateman and CEO of the Arora Group.
When I was learning the ropes as a corporate banker 30 years ago, the name of a popular Italian alcoholic liqueur was never too far from my mind. This had nothing to do with an incipient drink problem. In fact, CAMPARI was one of the keys to any professional banker’s success in their role.
To us, CAMPARI was less important as a cocktail ingredient and more important as an acronym for the elements used to assess the risk profile of a company. There were slight variations but essentially it stood for ‘Character’, ‘Ability’ (to repay), ‘Management’, ‘Purpose’, ‘Amount’, ‘Repayment terms’ and ‘Insurance’.
As a corporate banker, as well as learning to break down and assess risk profile, you were taught the principles of lending, interpreting company forecasts, levels of gearing and the ability to service debt from free cashflow. Just as importantly you learned to use your judgement. After all, assessing the risk in lending to businesses is just as much about more qualitative factors – such as culture and morale; ability to compete; and the quality of the management, investment and product or service – as the quantitative ones. What you learn from talking to management, visiting a business and looking at its competitors is critical to making high quality decisions, in good and bad times. It will also help you to work with a company during more difficult times, so that they come out of it with a business and you come out of it with your loan in good shape.
This knowledge was largely gained on the job through direct, day-to-day activity, and was supplemented by banking exams and other professional qualifications. Over time, you became an individual who could assess the creditworthiness of a company, make judgements on their ability to repay and structure lending according to their unique circumstances: in every sense of the word a true banker.
In the years since then, algorithmic credit scoring models have come to dominate the lending process, resulting in a rigid system which tends to churn out results in terms of “your company’s rated 4.6 so we can lend you £20m”. This has taken away the need (or at least the perceived need) for judgement and turned lending into a game of numbers, whereby it has become a question of feeding figures into a ‘black box’, then taking the resulting rating and looking at a grid to translate that into how much money can be lent. As a consequence, over a period of time the need for professional skills and qualifications has diminished, because you simply haven’t needed them in your day job anymore.
Fast forward to 2020 and suddenly the limitations of credit rating algorithms are being exposed: basically, the problem with this kind of modelling is that it interprets only the numbers and fails to account for less easily quantifiable factors. What’s more, it does so only in the context of information about how companies have performed in past economic situations. We’re now at a point where ratings are irrelevant because they are based on historic information which has little resemblance to the situation now or in the foreseeable future.
Suddenly, banks are going to have to go back to basics in terms of judging the viability of companies and their ability to repay. In this situation, with some of the more traditional methods of understanding business lending set to come to the fore, many banks are going to find significant gaps in the skillset of their workforce.
While in the short term this is a cause for concern, in the long term it may be the best thing that could happen to the need for professionalism and qualifications in banking. I expect to see more demand for a number of the qualifications the Institute offers, and I believe that can only be a good thing for the banking industry.
Steve Pateman is Vice-President of the Chartered Banker Institute and CEO of the Arora Group. Hear more from Steve on page 25 of the Summer 2020 issue of Chartered Banker magazine.