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