Bank and Credit Risk
Credit Risk Organizational Structures
Credit Risk Assessment
Credit Scores and Credit Bureaus
Limits and Risk Appetite
Loan Facilities
Loan Balances
Risk-Adjusted
Credit Authorization
Collateral Management
Credit Portfolio Monitoring and Control
Workout Process
Definition of Credit Risk
The Asset Exposure
Recovery Value
Collateral and Third-Party Guarantee
Modelling Credit Risk
Time horizon
Data inputs
The Board of Directors has overall responsibility for all risks of the bank and sets strategy, policy, and limits
The Board must have a Risk Management sub-committee
The Board sub-committee must take a coordinated and integrated approach to the range of risks
Credit Scores - numerical expression of creditworthiness generated by a statistical model using pertinent data
Credit Bureaus - collect and aggregate personal and financial information from sources including creditors, lenders, utilities, debt collection agencies, and public records
set the quantity and type of risk the bank will tolerate within its total capacity to pursue its business objectives
Financial Analysis Corporate financial statements
Leverage ratios
Liquidity ratios
Profitability ratios
Efficiency ratios
Line of Credit
Revolving Line of Credit
Asset Based
Term Loan
The bank needs to believe the merger will be cash generative to reduce leverage in a reasonable time frame
Loan Pricing RAROC (Risk-adjusted return on capital) is the profitability of capital after considering all costs
measure expresses expected profit (net of all costs including expected losses) as a percentage of economic capital, or worse case loss.
Minimum requirements for information and analysis
Minimum underwriting standards
an excellent risk mitigant and is recognized in the Basel Accord’s loss given default methodology
The liquidation of collateral can involve legal, market, and reputational risk, as well as time and resources
adapts to rebalance the portfolio by adjusting limits, pricing, maturities, and requirements
the credit portfolio management team have the tools to control risk and optimize the profitability of the portfolio
The effectiveness of credit portfolio management depends on accurate, uniform, aggregated, and timely data
Corporate Debt Restructuring - Banks attempt first to refinance debt, which involves extending the maturity and thus reducing and rescheduling payments.
outright default due to bankruptcy, liquidation or administration, or it can be something short of full default
loss due to credit migration
The asset exposure on a balance sheet is not comprised solely of live loans
The main risk management mechanism for asset exposure risk is by means of credit limits
virtually all defaulted assets return an element of recovery value, although the time taken to realize this value can be very long indeed
The existence of these features complicates the credit risk management process
The credit risks to each obligor across the portfolio are restated on an equivalent basis and aggregated in order to be treated consistently, regardless of the underlying asset class
correlations of credit quality moves across obligors are taken into account
The choice of time horizon will not be shorter than the time frame over which risk-mitigating actions can be taken
Credit exposures
Obligor default rates
Obligor default rate volatilities
Recovery rates