StudentShare solutions
Triangle menu

Credit Risk - Research Paper Example

Nobody downloaded yet

Extract of sample
Credit Risk

The following part of this paper will make one aware of the concept of credit risk in detail. Credit risk-background The last few decades witnessed the collapse of some major banks as a result of borrowers’ credit repayment failure. Hence, many of the world’s largest banks and other financial institutions have developed comprehensive systems in order to deal with credit risk arising from different aspects of their businesses. The main objectives of such systems involve the identification, quantification, aggregation, and management of credit risk exposures. In modern days, those systems constitute a major part of risk management and performance measurement. Circumstances of credit risk Credit risk issues mainly include lost principal and interest, diminishing cash flow, and rise in collection costs. The credit risk arises in a number of situations and some of them are described below. A business or consumer fails to pay the amount due on a mortgage loan, credit card, or other loan. A business or consumer makes no payment due on a trade invoice. A business fails to pay a worker’s earned wages when due. A government bond issuer does not pay the amount due on a coupon or principal payment. An insolvent insurance company does not make a payment due on a policy obligation. A government sanctions bankruptcy permission to an insolvent business. Types of credit risk The credit risk is mainly of three types including default risk, credit spread risk, and downgrade risk. Default risk: When companies or individuals are unable to make payment due on their debt obligations, it is called default risk. Lenders and investors are vulnerable to default risk in all forms of credit extensions. In order to mitigate the issues associated with the default risk, lenders often charge return rates that equals the debtor’s level of default risk. Credit spread risk: According to Fabozzi, when an issuer’s obligation performs inefficiently relative to other bonds as a result of an increase in the credit spread, it is called credit spread risk (638). When the credit spread increases, it leads to a proportional decline in the market price of the bond issue. Downgrade risk: as Fabozzi points out, an unexpected downgrading of an issue results in an increase in the credit spread and it subsequently leads to a decline in the price of the issue (638). Such a risk is known as downgrade risk; it is very closely related to credit spread risk. Assessment of credit risk Nowadays, a variety of improved sources and sophisticated programs are applied to evaluate and manage credit risk. Some companies have established separate credit risk departments to examine the financial potency of their customers and sanction (or not) credit accordingly. Such departments conduct in house programs to effectively deal with the avoidance, reduction, and transfer of credit risk. Standard & Poor’s, Fitch Ratings, and Dun and Bradstreet are some of the examples of organizations providing credit risk management services for a fixed fee. Majority lenders use their own models to determine and class existing as well as potential customers on the basis of risk and thereby to apply most suitable strategies. In case of products like unsecured personal loans and mortgages, lenders usually charge relatively higher price for higher risk clients in order to secure the transaction to some extent. In ...Show more


(Last Name) Credit Risk Introduction In financial accounting, the term credit risk has considerable significance. To define, “credit risk is the risks that a counterparty may be unable or unwilling to make a payment or fulfill contractual obligations” (Gregory, 2010, p.2)…
Author : kaylin48
Credit Risk essay example
Read Text Preview
Save Your Time for More Important Things
Let us write or edit the research paper on your topic
"Credit Risk"
with a personal 20% discount.
Grab the best paper

Check these samples - they also fit your topic

How the Fico or credit score impacts on consumers
For instance, it can determine what one pays for leasing or auto financing, credit card rates, car insurance and mortgages. It can affect things we may take for granted like whether one gets a job or rent an apartment. When applying for credit, the lenders want to know your credit risk level.
7 pages (1750 words) Research Paper
Default Risk Management
Only if the financial institutions and analysts identified the market trends and analysed how the market would perform then they would be able to predict such a crisis, and, therefore, steps would be taken accordingly. However, this has not been the case and today the financial institutions are trying their best to minimise the impact that has been caused by the crisis, and they are evaluating and trying out different strategies to improve their financial position so that they can meet their financial obligations.
7 pages (1750 words) Research Paper
Credit Risk Assessment of Bank Customers using DEMATEL and Fuzzy Expert System
This banking system is very beneficial to its users but its contains risks like any other firm that requires profitability. One most evident type is credit risk that is greatly assessed in this paper with the use of Dematel method and fuzzy expert systems.
7 pages (1750 words) Research Paper
Building a Rule Based Credit Risk Assessment Expert System
Normally, credits can be offered to individuals or businesses to facilitate repayment of their bank mortgages, to purchase vehicles, credit card purchases, and installment purchases among other financial usage. In some cases, credit users may default repayment of these credit and loans services (Hayre 56).
5 pages (1250 words) Research Paper
Identifying and Managing Risk
Research Problem The problem of the research is, “Compare and evaluate risk management techniques from experts in the field?” Literature: Financial risk management techniques The risk management techniques in the field of finance include identification of the areas of financial risk and measuring it and then applying the use of financial derivatives and other instruments in order to mitigate the actual risk level to the desired level of risk exposure.
3 pages (750 words) Research Paper
Business Continuity Planning - Program Initiation, Risk Management (Risk Evaluation) & Incident Management
BCP “is a must in an organization’s overall efforts to prepare for, respond to, and continue or restore operations following a disaster” (Kildow n.pag.). BCP is essential to the bank’s stakeholders because this will ensure that NBC is capable of delivering their
4 pages (1000 words) Research Paper
Default Risk Management
According to the report identification of risk is one of the major steps that businesses need to focus on. If the risks are not identified, then they cannot be mitigated or their impact cannot be minimised, and this is the reason why the businesses need to analyse different trends in the market and then take actions accordingly.
7 pages (1750 words) Research Paper
Credit Risk Assessment of Bank Customers using DEMATEL and Fuzzy Expert System
This paper consists of credit risk management that is carried out with the implementation of computed technology to increase credibility of customer’s therefore increasing
7 pages (1750 words) Research Paper
Building a rule based credit risk assessment expert system
In some cases, credit users may default repayment of these credit and loans services (Hayre 56). Therefore, lending institutions normally deploy numerous and
5 pages (1250 words) Research Paper
Risk Management
Financial risk management comes within various financial functions of an organization and is an indication of changing nature of this
10 pages (2500 words) Research Paper
Hire a pro to write
a paper under your requirements!
Win a special DISCOUNT!
Put in your e-mail and click the button with your lucky finger
Your email
Comments (0)
Click to create a comment
Contact Us