Title: The Personal Cost of Ethics: Regal National Bank's Loan Loss Reserve
Abstract: Introduction Ted Carew had just left a meeting with John Wilson, the Senior Credit Officer of Regal National Bank. During the meeting, John instructed Ted to reduce the loan loss reserve allocations for the bank by $60 Ted raised objections, but John countered each one of his concerns. Although John was his direct supervisor, Ted was conflicted about the implications of reducing the bank's loan loss reserve. He was disturbed by the response he was given when he voiced his reservations. Heading back to his office, Ted struggled with what he should do. Situation Ted Carew worked in credit administration for the last 12 years. He had extensive experience in dealing with problem loans and with bank regulatory agencies. Six months ago Ted accepted a position as Loan Review Manager for Regal National Bank in Houston, Texas. He was charged with the responsibility for identifying and classifying problem loans and determining the bank's loan loss reserve. Accurately identifying problem loans was essential in order to minimize eventual loan losses. Loan loss reserve allocations were an expense that directly reduced net income and impacted the capital adequacy of the bank. During an economic downturn, loan losses eliminated the profits of the reduced its capital, and resulted in potential failure of the bank. Over the last two years, the regional economy suffered a serious downturn in the energy industry comprising much of the middle-market loans, which were loans to businesses that did not have access to the public bond and commercial paper market. Middle market loans made up most of Regal National Bank's commercial loans and range in size from $100,000 to $100,000,000. Overbuilding in the commercial real estate market started to emerge. As a result of the economic downturn, all other major banks in the region reported quarterly losses due to the rising number of loan losses. However, Regal National Bank reported the highest return on assets of any bank in the country with over $10 billion in assets. shareholders were rewarded with a rapidly increasing stock price, and, publicly, management was highly regarded for its efficiency and superior ability to evaluate middle-market loans. Over the six months that he held this job, Ted Carew identified $100 million in additions to the loan loss reserve in middle-market energy loans and commercial real estate. Ted's problem loan reports detailing loan loss reserve allocations for each individual loan were distributed to the three top managers in the John Wilson, the senior credit officer, Cy Fox, the chief financial officer, and Miller Lane, the president and chairman of the board. three top managers worked closely together for over 20 years and were all on the Board of Directors. These three officers had full authority over the bank's operations. problem loan reports were also distributed to four vice-presidents who managed the problem loans and discussed the loans with bank examiners. John Wilson, the senior credit officer, called Ted into his office and informed him, The Board of Directors approved a $20 million loan loss reserve allocation for the quarter, so you need to reduce the loan loss reserve allocations on your problem loan report by $60 million. and have already been over each of these loans. You know these allocations accurately reflect the condition of the loans and the financial condition of the bank, responded Ted. I don't feel can justify reducing the allocations. John answered, Ted, you know that loan loss reserve allocations are subjective estimates of the future. Reasonable people can have differing evaluations of the amount of reserve needed. …
Publication Year: 2012
Publication Date: 2012-01-01
Language: en
Type: article
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