Loan Committee

Definition

A loan committee refers to the loan or management committee of a bank or other lending institution. It is typically composed of senior executives with managerial authority. The loan committee analyzes and subsequently approves or rejects any loans that the initial loan officer does not have the authority to approve, usually those that are larger in size or higher in risk. The committee ensures that loans comply with the institution's standard lending policies. If the requirements are met, the committee can agree to provide and disburse the loan and make binding commitments.

Origin

The concept of a loan committee originated with the development of the banking industry, especially as banking operations became more complex and loan sizes increased. Banks needed a specialized body to manage and control loan risks. With the evolution of financial markets, the functions and importance of loan committees have gradually increased, becoming a crucial part of bank risk management.

Categories and Features

Loan committees can be categorized based on their functions and authority, such as credit committees and risk management committees. Credit committees are primarily responsible for approving and managing credit operations, while risk management committees focus on assessing and controlling loan risks. Key features of loan committees include high-level decision-making authority, strict approval processes, and a strong focus on loan risk management.

Case Studies

During the 2008 financial crisis, many banks' loan committees faced significant challenges. For example, Citibank's loan committee failed to effectively control the risks of subprime loans in the early stages of the crisis, leading to substantial losses. In contrast, JPMorgan Chase's loan committee performed well during the crisis, successfully avoiding large-scale loan losses through stringent risk assessment and control measures.

Common Issues

Investors often misunderstand the role of loan committees as a single decision-maker, overlooking their collective decision-making nature. Additionally, the decision-making process of loan committees may be affected by information asymmetry or external pressures, leading to potential decision errors.