Bank Credit Risk Management - Dissertation Example

Download file to see previous pages The obnoxious cases of bank failures, acquisitions, and consolidation have steered the focus of management of the financial institutions in restructuring operations, improving asset quality, and building loan portfolios with credit risk management as the base structure (Yo & Yusoff, 2009, p.46).

Influence of credit risk management on the banks
Credit risk management has an overwhelming concern for financial institutions especially that of a bank. Credit risks in simple language can be defined as the potential that the bank borrower or the counterparty will fail to meet its obligations with various agreed terms. The basic objectives of credit risk management are directed toward the maximization of the risk adjustment of the bank with the maintenance of the credit risk exposure within the domain of various accepted parameters (which may vary from time to time). The banks basically require managing the credit risk intrinsic in the entire portfolio as well as the risks in the individual credits or the transactions.

The banks should also take into account the relationships between the credit risk as well as the other risks. The effective management of credit risk can be argued as a crucial component of a comprehensive approach toward risk management and are highly essential to the long-term success of any banking organization (Principles for the Management of Credit Risk, 2012, p.1). In the recent decades leading to the financial crisis, the banks have operated in an enhanced competitive market and as an involuntary mechanism are forced in taking more risks for seeking out higher margin actions. Securitization, commercial papers have created the platform where the banks can generate higher margin business by the process of converting the illiquid loans into marketable securities and thus lead to the release of capital for other investment opportunities. Empirical testing reveals that the process of securitization leads to the expansion of credit leading the banks to hold riskier assets (Casu et al, 2010, p.3).

From the perspective of the Basel Accord II, securitization exposures the banks have to abide by some norms like that proper documentation of the objectives, a summary of the bank’s policies for securitization, and whether there are limitations in the application of sophisticated credit risk management with the securitization method. Credit risk management can be successfully implemented if the banks adapt refined techniques for minimizing the risk of the expected losses (Securitization of Credit Exposures: Important Tool of Credit Risk Management under Basel Accord II, 2006, p.598).

Technology enhancing the process of credit risk management
One of the most important parts of credit risk management is of quantifying the risks and it is a very crucial part of the risk management process. From the perspective of Fabozzi (2006) (Principles for the Management of Credit Risk, 2012, p.9), the process of quantifying credit risk faces problems due to the lack of historical information collection and diversification involved between the borrowers and various default cases. But with the dramatic change in technology in the last twenty years, the process of credit management has been simplified with the process of quantifying credit risk with three fundamental pillars credit rating, credit scoring, and credit modeling (Zhao, 2007, p.14). ...Download file to see next pages Read More