Lesson 23 of 25 · 6 min

The risk system, the credit officer, and who actually decides

Most decisions affecting a facility are made by software running on a timer, and a person appears only at the exceptions.

The phrase the lender decided is usually wrong in a specific way. Three different things can produce a decision, and they are not equally common.

The first is the overnight run. Prices load, accounts are revalued, the schedule is applied, concentration and eligibility tests fire, and exceptions are written to a queue. Nothing here involves a person. Most of what a borrower experiences as a decision is this, and it happened while everyone was asleep.

The second is delegated authority. A credit officer holds written limits: an ability to waive a shortfall below some size, to extend a cure period by some number of days, to approve an exception up to a threshold. Within those limits the officer acts alone; outside them the item goes up. The third is a committee, which meets on a cycle and decides the things large enough to require it — schedule versions, book-level limits, individual exposures above the delegated size.

The proportions matter more than the structure. On a book of tens of thousands of accounts, a single night produces a few hundred exceptions, most of which clear against a de minimis tolerance without anyone reading them. A minority reach an officer and a handful reach a committee. Under one percent of accounts are touched by a human in a given night, and the ones that are, are touched because a rule said so.

Key terms

Delegated authority: Written limits within which a named role may act alone — a waiver size, a cure extension, an exception threshold. Above them, the item escalates.
De minimis tolerance: A small shortfall the system clears automatically rather than raising, commonly a dollar amount or a fraction of a percent, whichever is greater.
Escalation: The movement of an item up the authority chain when it exceeds the limits of the level below it.

Worked example

One night's queue

An illustrative book of 18,700 pledged accounts. The de minimis tolerance clears shortfalls under $2,500 or 0.5 percent, whichever is larger.

Accounts revalued overnight: 18,700
Exceptions written to the queue: 341
Cleared by rule with no person involved: 268
Routed to an officer under delegated authority: 66
Escalated to a committee: 7
Share of accounts a human looked at: 0.39%

Seventy-three accounts out of 18,700 met a person. Everything else was decided by a rule that ran at the same time it runs every night.

Check yourself

A lender revalues 19,600 pledged accounts overnight. Two and a half percent generate exceptions and 80 percent of those clear automatically against a de minimis tolerance. How many accounts reach a person, and what share of the book is that?

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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.