In a regular column for the Industry Insider, George Buchanan, Chief Risk Officer of Consumer and Wealth Management, Regions Bank, and RMA National Board Member, offers his insights on risk issues and challenges facing the industry.
Like many of you, I participated in a formal management training program when I started my career in the banking industry. The experience I gained has shaped my career in many ways, but I often reflect on one of the most seemingly simple topics I learned three decades ago — the Five “Cs” of Credit. You are likely familiar with these: Capacity, Capital, Collateral, Conditions, and Character.
Of these, the one that is potentially the hardest to assess and is probably the most misunderstood is character. That’s why we spent so much time on it during my days as a young banker and management trainee. While it may be easy to review a credit report or perform a formal background check, it takes hard work to understand a potential borrower or guarantor’s personal traits, integrity, and moral codes. It is critical for bankers to truly know their customer, have a sense of how they may react when difficulties arise, or predict what they will do when challenges emerge in their personal or business financial condition.
Why is knowing your customer’s character so important? Think about what we have gone through during the past 20 months. Our industry provided support to millions of businesses through the Paycheck Protection Program, provided wide-ranging assistance via deferrals and forbearances to help consumers through hardships not of their own making, and shifted our working environment, which resulted in considerable changes in how we meet with clients and originate new accounts. We had no choice but to adapt alongside our customers, place greater reliance on their character and how they would respond to these challenges, and remain connected to appropriately monitor outcomes.
Banking may not be as simple as it once was, as the environment has changed dramatically, particularly with the advent of technology, digitization, and fintech competitors. Regardless, the basic tenets of banking still matter. Knowing your customer is as important as ever.