Human capital and credit risk management: Training is more valuable than experience

Abstract

The aim of this article is to assess how human capital, and more specifically training and experience, helps in forecasting and monitoring credit risk. It uses a survey of a sample of loan ofcers in a major French mutualist bank and applies analysis of variance and correlation to determine the relationships among variables. The study of these two components of human capital in SME loan ofcers shows that their ability to anticipate risk depends above all on their training rather than on their experience. Some methods of anticipating risk are more important than others. Loan ofcers monitor their clients in similar ways, whatever the degree and nature of their experience. The findings have two important implications for credit risk management and human capital: first, both technical and regulatory training is crucial to enable loan ofcers to anticipate bank credit risk, second, experience, whether in banking or as a loan ofcer, only makes a diference in monitoring risk. These results will be useful when banks are planning recruitment, career management and resource and skills allocation. Tey also suggest that staf knowledge management will enable banks to use their human capital effectively to reach their own objectives with regard to risk control, and those fxed by the regulators. This work is, as far as it is known, the first to study the role of human capital in managing credit risk. The authors show that training is more important than experience in default risk anticipation, but that experience is useful in risk monitoring.