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RISK MANAGEMENT & FINANCIAL INSTITUTIONS (Credit Risk (Principles…
RISK MANAGEMENT & FINANCIAL INSTITUTIONS
Balance sheet & Risk
Liabilities
Check able deposits
Borrowings
Capital
Stocks
Retained earnings
Asset
Deposits at other banks
Loans, credit cards, Financing
Credit Risk
Principles
Principle of proportionate stake
Principle of Pari Passu
Principle of protection
Principle of control
Principle of well-spread lending portfolio
Principle of good first way out
Principle of appropriate tenor in financing
Principle of reflective national policy
Screening
Components
Credit evaluation(The 5C's Approach)
Credit scoring
Credit Analysis
Real estate lending
Mid size commercial and industrial lending
Credit risk & asymmetric of information
Adverse selection
Collateral
Credit Rationing
Screening
Compensating balance
Moral hazard
Monitoring
Long-term customer relationship
Loan commitment
Monitoring and enforcement
Restrictive covenant
Legal action
Bankruptcy notice
Collateral
Property promised as compensation(lender)
Compensating balance
Keep minimum amount of fund(borrower)
Credit rationing
No loan is extended
Rationing the amount financing to the limit
Long-term customer relationship
Existing savings/current account
Other loan commitment
Salary instruction
Loan commitments
Provide firm a negotiable interest rates/market rate
Liquidity risk
Liquidity risk & depository institutions
Asset side liquidity risk
Liquidity can be obtain through
Selling liquid asset immediately
Borrow/purchased funds market up to max amount
Using any excess cash reserves over and above the amount
Liability side liquidity risk
Measuring bank;s liquidity exposure
Net liquidity statement
Peer group Ratio comparison
Liquidity index
Financing gap & financing requirement
Liquidity planning
Interest rate
Steps
Analyze the effect of IR
Liabilities>assets(Sensitive), rise in IR reduce the NIM & income.
Decide which asset & liabilities are rate sensitive
Measured through
Repricing model of funding Gap Model
Duration Gap Model
Insolvency risk
Deposit insurance
Discount window