How banks in Malta manage risk and uncertainty in the process of assessment of mortgage loans

Abstract

In the field of banking, it is necessary to scrutinize credit risk in a rigorous way. In order to evaluate the creditworthiness of an individual, banks in Malta to a certain extent use their own terms and models. However, the decision-making process of mortgage loans lacks transparency. Apart from factors that can be measured, uncertainties – for instance, future or external events – have to be taken into consideration. Financial institutions hire risk-averse personnel in order to deal with the struggle of measuring such uncertainties. The objective of this research was to investigate risk and uncertainty in relation to the process of the evaluation of mortgage loans in some of the banks operating in Malta. This concerned, in particular, the credit analysts’ decision-making that involved personal judgements combined with the objectivity of the mechanical assessment system. By researching the literature in the field of decision-making and risk, and conducting a qualitative online questionnaire with eight credit analysts, this study attempted to determine what drives important decisions on risk and uncertainty. It was found that both intuition and heuristics played a crucial role in the analysts’ judgement process, and that all the analysts that featured in the sample relied on technology only to a certain extent.