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A critical study of credit risk management in the First Bank of Nigeria PLC - Dissertation Example
Author : westalexys
Finance & Accounting
Pages 52 (13052 words)
Any kind of probable loss is a risk and needs to be computed. The volume of such losses depends on the risk management concept and its technicalities. In banks, the most important risk issue is the credit risk issue…
All types of transactions have risk factors attached to them. If considered as an isolated case, then the loss can be treated as standalone. However, if a portfolio is considered like financial instruments and loans, there is the diversification effect which means risks of individual transactions get diluted. This is because every individual transaction cannot become a bad debt, and it is also not possible that all financial instruments of a trading book will end up as losses caused by market movements. It is universally accepted that the “sum of individual risks is less than the risk of the sum.” There is also the concept of dependency, i.e. inter-related events which determines the effects of diversification. For instance, a loan can become a bad debt depending on some common factors like the economic condition of market. Therefore to compute the risk of portfolios, it is necessary that these common factors be monitored (Bessis, 2011, pp.25-26). Credit risk can be defined as the non-ability of a debtor or issuer of any financial instrument to make payment of the principal amount as per the terms and conditions of the credit agreement (Greuning & Bratanovic, 2009, p.161). The loss that occurs is related to the valuation of the financial instruments and their liquidity. The financial instruments can reduce at high rate if the default is totally unexpected. ...