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Chapter 5 Credit Risk (3) Credit Risk Management (3.2 Credit -granting…

- - - - 2.1 individual
        
        corporate cr
        
        sovereign cr
        
        retail CR
        
        counterpart cr
      - 2.2 portfolio
        
        correlation
        
        concentration risk
        
        standalone cr
    - - 3.2 technical default
        
        violation of debt covenants, agreements
      - 3.3 default resolution
        
        restructuring
        
        agreement between lender and borrower to modify he terms of the loans
      - 3.1 administrative errors
        
        failure to pay financial obligations due to administrative errors
      - 3.4 bankruptcy
        
        insolvency bankruptcy filing
        
        formal legal proceeding for borrowers who are already insolvent
        
        no longer has the capacity to pay its obligations as they come due or when the borrower's assets are less than its liabilities
    - - 1 probability of default
        
        the likelihood of occurrence or the chance that the borrower or the counterpart will fail to meet its obligations
        
        describe qualitively
        
        continuum that ranges from no likelihood to the certainty of occurrence
        
        describe quantitatively
        
        the likelihood of loss is frequently referred to in practice as the probability of default (PD) -expressed as a continuum 0% to 100%
        
        Factors impacting the PD
        
        competitive position in the industry
        
        a borrower with the dominant position in the industry is less likely to default than borrowers with less dominant positions.
        
        developments in the borrower's industry
        
        borrowers which operate in volatile industries tend to display a higher PD than borrowers which operate in more stable industries
        
        financial standing and condition of the borrower
        
        the stronger the borrower/counter party's financial standing and conditions, the lower the likelihood that the borrower or counterpart will fail to meet its obligations
        
        state of the economy
        
        the borrower/counterpart will more like to default during economic recessions than during economic expansions
      - 1.2 loss given default
        
        the consequences of the borrower or the counterpart's failure to meet its obligations
        
        describe qualitatively
        
        magnitude loss can be range from no loss to medium loss to full loss
        
        describe quantitatively
        
        quantified as a percentage of loss over the bank's total exposure in the event default
        
        LGD=100% - recovery rate
        recovery rate increases, the amount of loss given default decreases
        
        recovery rate
        
        4 more items...
- - - - ead
        
        amount outstanding in the event the borrower defaulted
      - lgd
        
        % of the exposure that the might lose in the event of borrower defaults.
        100%-Recovery rate
        
        RR is the proportion of the defaulted obligations that the bank can reasonably exppect to recover from bankruptcy or foreclosure in the event of a default.
        RR= % of the Face Value of exposure
      - pd
        
        degree of likelihood that the borrower will not be able to meet its obligations as they come due
    - - general loan
        
        loan portfolio as a whole
      - specific loan
        
        loan classification
        Standard loan, specially mentioned loans
        substandard loans
        doubtful loans
        loss loans
  - - - the curve shows that losses below the EL dashed line are expected to occur more frequently
    - - the shaded region represents potential that are not covered by the bank's capital
- - - - sufficient information to enable the evaluation and assessment of the counterparty/borrower's credit risk type
    - - deciding whether the borrower is worthy of the credit being granted
    - - lending business unit proposes the financing/lending to the prospective borrower
      - involves the establishment of overall credit limits on single borrowers or counter parties and groups of connected counterparts
  - - - function that monitors the condition of individual credits and single obligors across the bank's various portfolios
      - involves ensuring that the actual exposures do not exceed established limits
    - - quantification of risk both on a standalone level and on a portfolio level
      - credit measurement models
        
        financial statement analysis
        
        external ratings services
        
        accounting scoring-based models
        
        expert systems
        
        quantitative models
    - - critical element in maintaining the bank's safety and soundness-is a support team within the organization that monitors the quality of credit transactions
  - - - has the overall responsibility for setting the tone for the organization's credit risk enviroment through approving and periodicly reviewing the credit risk strategy and significatnt credit risk policies
        
        credit risk startegy
        
        establishes the objectives of guiding the bank's credit-granting activities and adopting the necessary policies and procedures
        
        the strategy should be reflect the bank's risk tolerance and profitability objectives
        
        strategy for selecting risks, maximizing profits and determine acceptable risk and reward trade-off for its activities after factoring the bank's cost of capital
        
        strategy to address the cyclical effect of any economy
        
        goals of credit quality, earnings and growth
        
        statement of the bank's willingess to grant credit
        
        credit policies
        
        establish the framework for lending and guide the credit granting, administration, measurement and management practices of the bank
        
        the area focus
        target markets, portfolio mix, concentration limits, country risk, roles and responsibilities, specific policies and procedures for the entire credit process
        (credit origination, credit appraisal and review, credit approval , credit documentation, credit administration, problem loan management, credit portfolio management , credit control , internal audit, credit policy and process review
    - - has the responsibility for implementing the credit risk strategy approved by BOD
      - credit risk management
        
        credit measurement
        
        credit monitoring
        
        credit administration
        
        responsible for implementing the risk control framework with respect to cr
      - corporate banking
        
        responsible for originating and building the bank's credit portfolio