Sweden’s credit risk maverick

“We don’t like portfolio management,” says Björn Börjesson, executive vice-president and head of the central credit department at Svenska Handelsbanken in Stockholm.

“We don’t have quotas for different industries, or geographical areas, which I can see from your smile differs from what other banks do.” Indeed, Handelsbanken’s attitude towards modern credit risk measurement and management does differ substantially from today’s accepted conventional wisdom among Risk magazine’s readership. At this bank’s credit risk department, there are no fancy modelling packages, no sophisticated data warehouses and no credit-scoring systems. Some risk managers at competing banks in the region view his practices as decidedly old-fashioned. But others say he has a point – that his indictment of modern portfolio practices in bank lending does contain fair criticisms of theory and practice overall.

Indeed, at Handelsbanken, responsibility for most credit lending decisions lay with individual branch managers at the 458 branches scattered throughout Sweden. The bank operates in Denmark, Finland, Norway and the UK along similar principles. According to Börjesson, branch managers are groomed for the post over several years after they are recruited from Swedish universities. “We recruit people from school and try to keep them all their lives at the bank,” he says. “That way we can get to know them and we can form them to be Handelsbankers. Then we know when we appoint a young man or woman to be a branch manager that he or she is good enough, because we trust this person.” Indeed, the emphasis on stability runs beyond just the recruiting process – there hasn’t been a major reorganisation at the bank in over 30 years, says Börjesson, who is 51 and has been with the bank since 1981.

This training process – which harkens back to the white-shoe firms of yore on Wall Street – has stood the firm in good stead. Loan-loss levels have consistently been substantially below those of competing banks in the same region [see chart]. He claims that his way of managing risk is just as valid – if not better – than the fancy technology that other banks employ. “There is a strong tendency to centralise decision making [at other banks], and when you do that, you don’t have people outside [headquarters] to trust,” he says. “What do you do? You have an enormous portfolio to manage and just a few people to do that, so then you have to do portfolio management. But if you have people in all the branches who know their customers, know how the bank works, know what risks we want to have and what risks we don’t want to have, then you don’t need portfolio management.”

If there is one modern buzzword that Börjesson does like, it is ‘relationship banking’. “We are interested in what you are doing, and would like to understand how you are working, and how things are produced,” he says. “And then we’ll discuss a loan. In that sense I think that relationship banking is very good, both for the customer’s feeling of natural interest from the bank, and also to reduce risk.” For example, after September 11, Börjesson sent a memo to all the branch managers asking how they viewed their exposures in the airline, hotel and insurance industries. Branch managers, in turn, held conversations with their clients. Although the bank reduced its exposure to one client, it held fast on all others. “We asked the question and had the dialogue,” he says.

But Börjesson and Handelsbanken face a substantial hurdle in the form of the planned revisions to the Basel Accord. “The Basel Committee loves credit scoring, and we don’t like credit scoring, if credit scoring means that a machine makes the decision or almost makes the decision,” he says. “We like to make the decision on our own, we like to meet the person and see into his or her eyes.” He does admit, however, that statistical techniques can impart useful information, but the challenge, he says, is how to work such a system into the Handelsbanken culture without promoting a ‘dumbing down’ of the credit decision-making process.

Modern portfolio theory earns an even harsher assessment from Börjesson. “We think many of the theories of portfolio management are right, but you could argue whether they are good enough,” he says. “And what happens if you put those systems in place? Do people stop thinking? It’s a dangerous tool, I would say.” For example, he says that according to a portfolio analysis theory, his bank should sell its mortgage lending business because the bank is overweight in its real estate exposure. “But we don’t do that,” he says. “We bought this business five years ago because we thought it was a good idea.”

Börjesson says his bank will go for Basel’s advanced internal ratings-based approach, but admits that it will be a challenge for the institution. “We have to convince the regulatory board that our system is good enough, and that it measures what it should measure,” he says. But changes to the actual internal system that Handelsbanken uses to measure and manage credit risk will be kept to a minimum, he insists. Rather, he will concentrate on articulating how the bank’s approach is simply another means to the end that Basel is trying to achieve. He says: “This transparency will require some explanation – how do we do the business? We have the answer, but we have just never put it on paper.”

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