The Importance of Credit Risk Management in Banking

The Importance of Credit Risk Management in Banking Credit risk implies a potential risk that the counterparty of a loan agreement is likely to fail to meet its obligations as per the original loan agreement, and may eventually default on the obligation. Credit risks can be classified into many forms such as options , equities , mutual funds , bonds , loans and other financial issues as well , which in extensions of guarantees and the settlement of these transactions. (International Auditing Practice Statement 1006 Audits of the Financial Statements of Banks) IS IT Important For the Banks To manage Their Credit Risks ? Risk is always associated with the banking activities, and taking risk is the important part of any banking operation, there is hardly any banking operation without the risk. Most of the bankers are said to be sound when they have a clear overview of what is the amount of risk involved in the current transaction and they make sure that some of the partly earnings are therefore kept for these risks. The granting of any form of credit is the common form for any bank and this risk is very common and this is the source of risks the banks are always exposed to. (Anderson et al, 2001). By being exposed to credit risk banks have been faced with a lot of problems. The banks couple of years ago realised that credit risk is important and the banks need to monitor, identify, control and measure it is very significant. Due to this the effective management of credit risk has become a critical component of approaching risk management. This approach will be especially important in terms of the long term success of any bank. Banks now ensure that they have large amount of capital against any form of credit risks so that they can be in a position to adequately tackle any risks which will be incurred. (Bank for International Settlement, 1999) The credit risk is in the entire portfolio of any bank and also the risk which is associated in individual credits or any other transactions have to be managed adequately. It is always a ascertained that the relationship between the credit risk and other forms of risks need be to considered very seriously in to account, in order to Increase shareholder value through value creation, value preservation and value optimization Increase confidence in the market place Alleviate regulatory constraints and distortions (Amitabh Bhargava ICICI, 2000) The Basel II Accord specifies that banks must have new procedures for measuring against credit risks. Advantages and Disadvantages of Credit Risk Management The advantages of Credit risk management include: Credit risk management allows predicting and forecasting and also measuring the potential risk factor in any transaction. The banks management can also make use of certain credit models which can act as a valuable tool which can be used to determine the level of lending measuring the risk. It is always better to have some alternative techniques and strategies for transferring credit, pricing and hedging options. The disadvantages of Credit risk management include: Deciding on how good a risk you are cannot be entirely scientific, so the bank must also use judgments. Cost and Control associated with operating a credit scoring system. With the existence of different models, it?s hard to decide which to use, more often than not, companies will take a one model fits all approach to credit risk, which can result in wrong decisions. How Banks Measure Credit Risk The level of credit risk faced by a bank is provided by the structure of a bank?s credit portfolio. If the portfolio consists of large amount of loans in a certain asset class then this might be an indication of an increased risk. Similarly the presence of complex financial transactions such as lending may also indicate a larger risk. In general a risk always comprises of two kinds: One is risk exposure and the other one is the uncertainty element, and for the credit risk and the credit quality represents the uncertainty element and credit exposure represents risk exposure. Therefore a bank can assess its credit risk by analysing the credit quality of an obligation and its credit exposure. While assessing credit quality and exposure a bank must consider three issues: Probability of default or any sort of possibility whether the other party which is the counter party will default on the obligation either over the life of the obligation over a specific period of time. The exposure of credit or the amount of the outstanding obligation which again depends on the size if there is any case of default. Rate of recovery this is the extent towards which the credit can be recovered through some banking processes like bankruptcy and other proceedings of settlements. In the last decade or so many banks have started to make use of models in order to assess the risks for their credit which they lend. The credit risk models are very complex and include algorithm based methods of assessing credit risk. The aim of such model is to help banks in quantifying, aggregating and managing credit risk. Despite the method the focus of credit risk assessment stays credit quality and risk exposure. Analysis of the Quality of Credit (Credit Quality) Credit quality is a measure of the that counterparties?s ability to perform on that obligation?. (Contingency Analysis, 2003) A bank adopts different approaches for assessing credit quality of considering loans to individuals or businesses. If it is for small businesses then the credit quality will be assessed through a process of credit scoring. This is based on information obtained by the bank about the party who want the loan. The information which is gathered tends to be about annual income, existing debts etc. Credit score is generally calculated by a formula which is applied to the information which is obtained which gives a number based on it the score is generated. The credit score is a highly accurate prediction of how likely the party is to pay bills, the higher the score the better it looks to the bank. (Curry, 2007) However, assessing a large party is based on credit analysis of the loan done by specially designated credit analysts. This just like mention above is base on credit scoring but it involves human judgement. It involves an in depth analysis of various aspect of the party in question including balance sheet, income statement etc. Also assessing the nature of the obligation is taken into account as well. On basis of credit analysis the analyst assigns that party a credit rating. This allows the bank to make decisions regarding credit. A bank can also use credit ratings to measure the share of the borrowers with creditworthiness in its portfolio and get a clear indication of default risk. Measuring Credit Exposure Credit exposure also needs to be taken into account when assessing credit risk or risk exposure. If for example a bank has loaned money to a business, the bank may calculate the credit exposure rate as the outstanding balance on the loan amount. However, in case if the bank by any chance has increased or extended the line of credit but none of the line have been drawn down then the approach will be different. In this case the risk exposure may seem to be nil, but it does not reflect any sort of right by itself to draw down the line of credit. If the firm gets into any financial difficulty it can be expected to draw on the credit line before any bankruptcy. Therefore in this case the bank may consider its credit exposure to be equal to the line of the credit. Credit exposure as a fraction can also be used sometimes to calculate the credit exposure for the total line of credit. (Duffie Singleton, 2003) How Banks Mange Their Credit Risk Credit risk management practices differ from bank to bank. Generally these type of practices are dependent on the type and complexity of the credit activities which are taken by the banks. In recent years banks have been using models for credit risk management. Bank Credit Risk Management Practices: Yesterday and Today The traditional approach to managing credit risk has been based on establishing a limit of credit at various levels for the individual borrowers an sometimes also based on geographical are and industry type. Also collateral and relationship exiting hardly seem adequate to cope with the declining economics of loan markets. (Gontarek, 1999) These limits specify the maximum exposures a bank is willing to take. Until the early 1990?s , credit risk analysis was limited only based on the reviews of the loans of individuals and most of the banks kept the loans on their books for maturity. (Bernanke, 2006) In recent years banking industry has made strides in managing credit risk. Managing the credit risks is the main focus of any banking operation these days and many banking?s are looking now from transaction management to portfolio management. And have slowly changed from monitoring to practising and also predicting their performance. Banks are still holding onto traditional credit risk management tools but these are becoming more and more sophisticated. Various forms of tools and models have been generated to measure and predict the performance and management of portfolio risks which in turn build competitive advantage. Despite the differences in the credit risk management practices the credit risk management in any bank rest on four pillar of: appropriate credit risk environment Sound credit-granting process or criteria that includes a clear indication of the bank?s target market Appropriate credit administration, measurement and monitoring process Adequate controls over credit risk. (Basel Committee on Banking Supervision, 2000) Therefore whether traditional or modern, credit risk management in banks involves reviewing creditworthiness of counterparties, setting credit limits for counterparties, evaluation of credit risk and reporting credit limits and exposures to management. (Caouette et al, 1998) Recent Trends in Credit Risk Management by Banks The credit risk management is undergoing an important change in the banking industry. Banks have clearly indicated that centralization, standardization, consolidation, timeliness, active portfolio management and efficient tools for exposures are the key best practice in credit risk management. (SAS, 2004) A bank in America is considering having efficient tools for ?what if? analysis and tools. Also another bank is focusing on stress testing, concentration risk, macro-hedges and capital market risk management. (SAS, 2004) The majority of the world?s large banks agree that integrating environmental and broader social issues into their core credit risk management process is essential to managing credit risk in the 21stcentury. (Huppman, 2005) Leading banks including Barclays now view that these non traditional issues as real credit risk variables that potentially affect their client?s bottom lines as well as their own. Quantitative models are being used by banks to measure and manage credit risk. Most of the Commercial bankers have started to opt for making use of the credit risk models for their credit options especially with relation to consumer lending and mortgage. These models are known as credit scoring models and were developed for consumer lending. On the other hand it has been a few years ago where the use of these credit risks models have been implemented successfully and are integrated these days with almost every bank to manage their risk. (Bluhm et al , 2003) In 2001, the UK?s biggest mortgage bank, Halifax, developed a forward looking credit risk management strategy which made use of quantitative models for risk management. (Algorithmics Incoporate, 2001) Similarly HSBC serves over 125 million customers worldwide and is the one of the world?s largest banking and financial services organizations. The world largest provider of quantitative credit risk solutions to lenders (Moody?s KMV) have decide to provide HSBC with this, which will provides HSBC a methodology for rapid, accurate measurement and benchmarking of credit risk portfolio. (Vyse, 2006) Role Of Management in Managing Credit Risk The board of directors of a bank approve and review the credit risk strategy and significant credit risk policies of the bank. The bank?s strategy reflects the bank?s tolerance for risk and the level of profitability the bank expects to achieve for incurring credit risks. These days banks establish and enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the management. Due to this credit risk is constantly monitored by the management. Innovations in Technology and Credit Risk Management Credit risk management in banks is also getting affected by innovations in technology. Innovations in technology have made significant improvements in bank information systems. This has also been encouraged by Basel II. The improvements in bank information systems has certainly increased the abilities of many banks and their management process to measure and identify and also control the characteristics of any kind of risk. For example ICBC (Industrial and Commercial Bank of China) the credit management computer system was further perfected with risk alert and conversion functions and it performed effective real-time monitoring on the quality and operations of the credit assets. (ICBC, 2001)

Programming Language and Future Career

Career-related discussions are something that my dad and I tend to have on the weekly basis, and have increased since changing my major to Management Information Systems last year. Our latest discussion was on the phone about word choice and the do’s and don’ts when writing/typing papers and other documents, moving forward in college as well as in my future career. What sparked up this conversation though was my dissatisfaction with a comment I got on a paper from a peer review. The comment stated that my choice of words were not â€Å"scholarly† or on the college level.It really got under my skin so I decided to call my father about it. I told him the situation, and I felt that my paper was scholarly and I wrote it in a way that my fellow classmates would understand. His response was, moving forward into my career, the choice of words I used really would play a big part. As more advice he told me that having a bigger vocabulary showed professionalism and knowled ge. Throughout our discussion I became frustrated because I believed that as long as my audience understood what I was talking about it should not matter how â€Å"simple† the words were.Even though I knew what he saying was right I did not want to hear it, because I was frustrated about the comment. I wanted to tell him that I didn’t care what he had to say after a while, but I have a lot of respect for my father. I knew what he was saying was right from experience being a computer programmer, where he is constantly in meetings and speaking in front of his colleagues. After we finish talking I still felt a little frustration, because I kept thinking back to the comment.I really was surprised by the valid points my father made about the situation because I was so set on the way I felt and my stubbornness took over. The discussion was really needed though, initially I was not going to go back and reedit my paper but my father words really made sense. I guess he was righ t the choice of words you choose can really go a long way. The advice I took from our discussion to help me in my future career was to continue practicing and improving my writing skills.

A Wedding I Have Attended Essay

Last year, I went to Taiping to attend my cousin’s wedding. She, unlike most of my family members, is a Christian. So, this was the first time I have been to a Christian wedding. Her wedding was held in the Chinese Methodist Church. The wedding had two receptions in two different places, one in Taiping and another in Kuala Lumpur, Malaysia. This marriage was traditionally done every step of the way. The marriage and betrothals were made a year ago by both bride and bridegroom. During the engagement, the bride and groom exchanged rings as symbol that they have tied a knot together. I could see the look on my cousin’s face that day, something that I cannot describe in words. She was grinning from ear to ear and I could tell she was really happy and also anxious at the same time. The engagement was held at the bride’s in Kuala Lumpur. Although it was just an engagement, it was held grandly because my cousin was the last one to get married in her family. All of my family members came all the way to Kuala Lumpur to see her get engaged. On the exact same day, the couple announced that their wedding will be held on the month of September. The reason they chose this date is because they believe that the safest season to get married is between the month of harvest and the month of Christmas, when food is plenteous. On the wedding day, the bridegroom was smartly dressed in a tuxedo. On the other hand, the bride looked stunning wearing a picturesque white gown and her face covered with a veil. Everyone was seated in the church with the groom and his best man, waiting for the bride. After a few minutes of waiting, the bride finally arrived. She was walk down the aisle by her father. This is one of the traditions of a Christian wedding. This indirectly shows that, when her father gives his daughter away, he is giving his blessing to the couple and acknowledging that her family approves of her choice. As she walked through the hallway of the church were the groom awaits, she was escorted by two flower girls, two pageboys and a few bridesmaids. The flower girls, who were looking very pleasant, threw flower petals on the floor. The pageboys on the other hand, were carrying a ring each. The bridesmaids consists of my cousins close friends were just overlooking the scenario. As soon as the bride was on the stage, where the bridegrooms was, my uncle handed over his daughter to the groom. Then, both of the bride and bridegroom kneeled down in front of the priest. The priest asked them the usual questions that are always asked in a Christian wedding. After both of them said â€Å"I do†, the bride and the groom exchanged rings. The priest pronounced them husband and wife, and his last word to the groom was â€Å"you may kiss the bride† indicates to the groom to kiss the bride and indirectly telling them that they are legally together as husband and wife. After that, my newly wedded cousin and her husband walk down the aisle again as husband and wife. Outside, a red Ferrari was waiting for them to take them to a fancy restaurant where the wedding reception is held. Me and all my family members followed their car from behind giving the newlyweds.

Essay Platos City-Soul Analogy and the Nature of Justice

What is the purpose of the city-soul analogy and does it help us understand the nature of justice? In his philosophy, Plato places a large emphasis on the importance of the idea of justice. This emphasis can be seen especially in his work ‘The Republic’ where, through his main character Socrates, he attempts to define the nature of justice and to justify this definition. One of the methods used by Socrates to strengthen or rather explain his argument on justice is through his famous city-soul analogy, where a comparison between a just city and a just soul/individual is made. Through this analogy, Socrates attempts to explain the nature of justice, how it is the virtue of the soul and is therefore intrinsically valuable to the†¦show more content†¦The component of specialization within the city-soul analogy, that of which classifies the working class as the most inferior in comparison to the ruling and guardians classes, and must succumb to the authority of the latter, raises questions to possible alternate purposes of the analogy. Perhaps, along with attempti ng to simply define the nature of justice, this analogy also attempts to pacify the portion of the city population deemed as appetitive and perhaps threatening, possibly to strengthen the political position of the philosopher-kings, a political class Plato was most likely apart of. Although Socrates is quite harsh in his definition of the working class and is straightforward in his requirement for it to succumb to the authority of its superiors, he provides a justification for the workers that allows the class to view their circumstance as inevitable or ‘natural’, thus not worth fighting against. Bernard Williams brilliantly words this view in his article ‘The Analogy of City and Soul in Plato’s Republic†: There have been those who thought that the working classes were naturally of powerful and disorderly desires, and had to be kept in their place. There have been those who thought that they were good-hearted andShow MoreRelatedPlato s View On Morality And Justice875 Words   |  4 PagesPlato’s Republic proposes a number of intriguing theories, ranging from his contemporary view of ethics to political idealism. It is because of Plato’s emerging interpretations that philosophers still refer to Plato’s definitions of moral philosophy as a standard. 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