Providing a Basis for Sound Lending and Investing

Your first responsibility for asset quality is to establish a basis for sound lending and investing in your bank. This is accomplished through policies developed by management that reflect the board’s expectations on asset quality and risk. The policies should be presented to the directors for their review and approval.

The investment and lending policies will have common components, such as:

  • authorities—detailing which bank staff may purchase investments or lend the bank’s funds;
  • duties—describing the actions expected of investment officers, loan officers and directors;
  • reporting requirements—specifying the information to be reported to you and how often;
  • documentation—establishing your documentation requirements of investing and lending decisions;
  • types of loans and investments—describing those that are acceptable or permissible and unacceptable to the board, consistent with its risk appetite;
  • portfolio management—stating the objectives you want met through the investment and loan portfolios; and
  • diversification and limitations—setting limits on concentrations of credit or assets so that all of the bank’s eggs aren’t in one basket.

There are abundant resources available, including the Internet, regarding the development of bank policies. For the lending policy, you may also refer to the "Matters to Consider in Developing a Loan Policy" under the Learn More column.