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1、March, 19981Principles of Credit Risk ManagementLecture #6March, 19982Credit Risk: DefinitionCredit Riskis the risk that a financial contract will notbe honored according tothe original set of termsor expectationsMarch, 19983Credit PolicyTo achieve commercial growth targetswhile maintaining or incre

2、asingthe quality of the banksloan portfolioMarch, 19984Three Facets of Credit Risk Management/Risk assessment (skill)/Risk taking (management decision)/Credit review & administrationMarch, 19985The Five Cs of Credit/Character -the willingness of the borrower to repayKnow your customer/Capacity -the

3、ability to repay the debt from cash flowDetermine income & borrowing capacity/Collateral -the security backing the loanCollateral acts as a guarantee/Capital -the strength of the borrowers Balance SheetDetermine Net Worth/Conditions - the sensitivity of the project to outside factors such as economi

4、c cycles & competitionAdapt the terms & conditions to the banks & clients needsMarch, 19986Approaches to Managing Credit Risk/Minimal Risk/Accept only those credits where there is no reasonable doubt that the asset will be redeemed at face value/Price for Risk/Classify loans into risk categories/Pri

5、ce loans to compensate for risk/Portfolio Risk Optimization/Diversify by industrial sector, geographical area, etc/Counter-cyclical projects/Mix of loansMarch, 19987Credit Policies & StrategiesThe policies formulated by the bank for credit risk management should cover:/Prevention - achieving the opt

6、imum credit standards (neither too strict nor too lax) and then focusing on the gathering, processing and analysis of information/Identification of problem loans - this involves monitoring the loan portfolio & classifying the loans based on information gathered. The early detection of (potential) pr

7、oblems is the key to loss limitation./Resolution of the problem loans - once problem loans have been identified, they need to be analyzed for possible solutions by the workout group. If no solution can be reached with the borrower, a liquidation or legal action may be necessary.March, 19988Strategie

8、s Employed in Credit Risk Management/Invest in MIS to enable the bank to obtain useful credit statistics/Encourage an open discussion of credit problems - there is no loan officer without problem loans, but hiding them should not be tolerated/Improve credit analysis, control & intervention procedure

9、s/Set adequate provisioning levels for problem loans & apply them consistently/Train credit officers and retain them/Include loan losses in any calculation of performance-related payMarch, 19989Credit Ratings (1)/Methodology- sovereign/macro analysis- sectoral analysis- regulatory environment- quant

10、itative analysis- qualitative analysis/Uses: categorizationof borrowers for:- pricing for risk- loan loss provisioning- portfolio optimization/Implications- cost of funds- share price- market reputation- confidenceMarch, 199810Credit Ratings (2)S&P RatingMoodys EquivalentDefault Probability(Subseque

11、nt Years)AAAAaa0.01%AAAa3/A10.03%AA2/A30.11%BBBBaa20.30%BBBa1/Ba20.81%BBa3/B12.21%CCCB2/B36.00%CCB3/Caa11.68%CCaa/Ca16.29%March, 199811Accounting for Problem Loans/Loans are valued on a net basis:Amount outstanding+Provisions(-)Interest suspense(-) Net loans+Provisions- Specific- GeneralIncome- Stan

12、dard/Non-performing- Non-accrual basis for non-performingDisclosure- GeneralMarch, 199812Common Measures of the Impact of Credit Risk1. Loan losses / average loans2. Risk adjusted marginNet interest margin - loans & security lossesAverage assets3. Non-performing loans / total loans or total assets4. Loans to single borrower / equity5. Loans to related borrowers / equityMarch, 199813Evolution of Lending Techniques/Co