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One dictionary describes a rogue as a "scoundrel."

But if you read further down on the page, there's a definition of "rogue elephant" that seems uniquely appropriate to the subject at hand: "an elephant  .  .  .  that separates from the herd and roams alone."

I've known a few, true rogue lenders. 

But in thinking back over the years and my colleagues at various institutions, I've probably known more lenders whose behavior resembles that of the rogue elephant than that of a scoundrel, per se.

Spotting the blundering rogue

What many people mean by the term "rogue lender" can easily be confused with an untrained or unsupervised person. 

"Rogue" can be shorthand for a sloppy lender--one who gets the bank into trouble by sloppy work habits or an inability to understand the principles of sound lending. 

If it's due to lack of training or lack of supervision, the problem, from the bank's point of view, is self-inflicted.

Any bank that fails to invest in proper training or appropriate internal controls must ultimately bear responsibility for the consequences of that person's activities.

Spotting the true rogue

True rogue behavior is any conscious or deliberate activity by an individual that endangers an institution by subverting its internal controls.

Examples of these sorts of behaviors run the gamut from deception to fraud.

They include such behaviors as:

• • Deliberate concealment of the true credit condition of the borrower.

• • Falsification of internal records of the bank, leading to a misrepresentation of the bank's financial condition.

• • Embezzlement or other criminal activity enriching the lender to the detriment of the bank or the customer.

The rogue elephant in his native habitat

To me, the lender who typically gets a bank into significant trouble is the "rogue elephant" type: The sort of lender who runs a book of business nominally within, but often substantively outside, the bank's internal controls.

He or she is likely the one to cut the corners on established procedures. Or the type to do many things as exceptions to the way the bank routinely processes or handles credit-related transactions. These sorts of exceptions are usually a great deal more than simply the recordation of documentary exceptions.

This type of rogue is often the person handling large accounts and complicated relationships who demands that the back office bend the rules for his important clients.

He's also likely the one with several years of lending experience and business development successes. So, when he "demands" a particular accommodation for his customers, it has a plausible ring to it. And, more often than not, the back office accommodates him. 

I knew a lender like that at The Bank of New York. He was a young vice-president. He handled several prestigious accounts and often demanded "above and beyond" service from the bank's internal staff for his customers.

He generally got what he demanded.

But one day, he slipped up personally and crossed the line of personal decorum. Suddenly, his demanding and high-handed ways caught up with him and he was without friends or allies.

In the blink of an eye he was terminated and while most of his colleagues understood what happened, I'm quite sure that he never did.

Traces of the species

How can you protect your bank? Be wary of the lender to whom everything is an exception. His customers seem to require exceptions to collateral handling,; exceptions to funding; exceptions to the normal lending rules that everyone else must conform to.

Rogue elephants often charm their way through the labyrinth of internal controls. They are the ones who elude detection that traditional audit trails identify.

Charming? Perhaps. But they are the possible "bank killers" and often expose the institution unsuspectingly to significant and undetected risks.

Each bank has its own unique culture, though all cultures have certain common characteristics. One important one is the level of commitment to the enforcement of internal controls.

Any management with a tepid commitment to its controls may ultimately find that they unwittingly have created a hospitable climate for harmful and dangerous activity.

About Ed O'Leary:

Veteran lender and workout expert O'Leary spent more than 40 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending.

    O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools.

    Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses and has been a frequent speaker in ABA's Bank Director Telephone Briefing series. You can hear free audio interviews with Ed about workouts here. You can e-mail him at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it . O'Leary's website can be found at www.etoleary.com.

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