12-04-2017, 10:13 AM
A credit risk is the risk of default on a debt that may arise from a borrower who does not make the required payments. First, the risk is that of the lender and includes the loss of principal and interest, the interruption of cash flows and the increase in collection costs. The loss can be complete or partial. In an efficient market, higher levels of credit risk will be associated with higher borrowing costs. Because of this, measurements of borrowing costs, such as yield margins, can be used to infer levels of credit risk based on market participants' assessments. Credit risk refers to the probability of loss due to the default of the borrower making payments on any type of debt. Credit risk management is the practice of mitigating losses by understanding the adequacy of a bank's capital reserves and loan losses at a given time, a process that has challenged financial institutions.
The global financial crisis - and the credit crunch that followed - put credit risk management at the heart of regulation. As a result, regulators began to demand more transparency. They wanted to know that a bank has a deep knowledge of customers and their associated credit risk. And the new Basel III regulations will create an even greater regulatory burden for banks. To meet the most stringent regulatory requirements and absorb the increased capital costs for credit risk, many banks are reviewing their approaches to credit risk. However, banks that see this as strictly a compliance exercise are being myopic. Better credit risk management also presents the opportunity to greatly improve overall performance and ensure a competitive advantage.
The global financial crisis - and the credit crunch that followed - put credit risk management at the heart of regulation. As a result, regulators began to demand more transparency. They wanted to know that a bank has a deep knowledge of customers and their associated credit risk. And the new Basel III regulations will create an even greater regulatory burden for banks. To meet the most stringent regulatory requirements and absorb the increased capital costs for credit risk, many banks are reviewing their approaches to credit risk. However, banks that see this as strictly a compliance exercise are being myopic. Better credit risk management also presents the opportunity to greatly improve overall performance and ensure a competitive advantage.
