This lesson examines the importance of a strong credit culture and the governance frameworks that support effective credit risk management.

2.1 Defining Credit Culture

A positive credit risk culture can be described as an environment of shared values and beliefs about an organisation’s approach to credit risk in which people behave according to accepted standards and principles when evaluating and discussing lending decisions . A strong credit culture is essential for sustainable credit risk management and organisational stability .

2.2 The Four Elements of a Strong Credit Culture

Moody’s Analytics identifies four key elements that successful credit risk organisations combine to build and sustain a strong credit culture :

  1. Leadership: Senior management must clearly articulate the vision, values, and beliefs that guide the institution’s lending activities and convey ownership of these values.

  2. Organisational Structure: Roles essential to credit risk management must hold appropriate credibility and authority, with clear reporting lines and accountability.

  3. Policies, Procedures, and Processes: These transform values into daily activities, with effective loan policy statements clearly guiding responsibilities.

  4. People: The performance of people is ultimately what drives and sustains a strong credit culture .

2.3 The Role of Leadership in Shaping Credit Culture

Leadership is the most critical element in creating and maintaining a robust credit culture. Key leadership actions include:

  • Clearly articulating the vision and values guiding lending activities.

  • Communicating the importance of balancing growth drivers with risk management.

  • Embedding human judgment as a critical cultural value—no loan should be granted without applying human judgment .

  • Championing the development of credit skills across the organisation .

2.4 Governance and Organisational Structure

Organisational structure directly impacts credit culture. Key governance features include:

  • Chief Risk Officer (CRO) / Chief Credit Officer: An integral part of the senior management team with appropriate authority and influence on lending activities .

  • Credit Review Function: In exceptional institutions, Credit Review shifts from identifying problem loans to reviewing and reporting on the strength of the credit process .

  • Credit Training: A high priority, with credit skills perceived as fundamental to a successful career path .

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