What does the term "underwriting" refer to in banking?

The term "underwriting" in banking primarily refers to the process of evaluating the creditworthiness of a potential borrower. This involves assessing various factors such as the borrower’s income, credit history, debts, and overall financial situation to determine the likelihood that they will meet their loan obligations. The underwriting process is crucial for lenders to mitigate risk by ensuring that they are extending credit to individuals or entities that have a good chance of repaying loans. This evaluation helps banks make informed decisions on whether to approve or deny loan applications, as well as on the terms of the loans they offer.

A significant part of this process includes analyzing credit reports and scores, which reflect the borrower's credit behavior over time. Underwriting sets the foundation for lending decisions and affects interest rate pricing and loan conditions, ensuring that banks operate within their risk appetite while serving their customers effectively.