In assessing credit risk

The source of individual credit risk is a separate, specific counterparty bank - borrower, debtor, issuer of the securities. Estimation of individual credit risk involves an assessment of creditworthiness of the individual counterparty, ie, his individual ability to timely and fully pay for the obligations undertaken. The main causes of individual credit risk: the inability of the borrower to the creation of an adequate cash flow, liquidity risk of collateral, moral and ethical characteristics of the borrower. Portfolio credit risk appears to reduce the value of the assets of the bank. The source of portfolio credit risk is the aggregate indebtedness of the bank in a transaction that is inherent credit risk - the credit portfolio, securities portfolio, a portfolio of accounts receivable, etc. Assessment of portfolio credit risk involves an assessment of concentration and diversification of bank assets: concentration - is the concentration of loans in a sector of the economy, diversifying is in the distribution of credit portfolio among a wide range of borrowers, which differ from each other in nature (the amount of capital ownership) and in terms of activity (economic sector, geographic region). The method of diversification should be used carefully and cautiously, relying on statistical analysis and prediction, considering the possibility of the bank, and, above all, the level of training. Diversification requires professional management and a deep knowledge of the market. That is why excessive diversification does not lead to a decrease and an increase of credit risk. But even a large bank does not always have a sufficient number of qualified professionals with extensive knowledge in many industries, they know the specifics of the various geographical areas, have practical experience with various categories of borrowers. Determining the optimal ratio between the levels of concentration and diversification of its loan portfolio is a task that should be resolved by management of each bank, depending on the chosen strategy, capabilities, and the specific economic situation. Category: Management Operations Commercial Bank | Tags: commission expenses, credit banking systems, loan