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Risk ManagementUniversity of Economics, Kraków, 2012
Tomasz Aleksandrowicz
credit risk management
credit risk definitioncredit risk management tools & techniques
credit risk
• risk of not receiving payment for granted loan or purchased products/services
• credit status– delayed payment– default (90 days+)
• defaulted loan causes losses of principal/interests and additional costs
main credit risks
• counterparty risk (risk of default)• concentration risk (big exposure risk)• sovereign/country risk (e.g. FX exchange freeze)
CRM tools & techniques
• credit policy• counterparty rating• risk based pricing• credit insurance/credit derivatives (e.g. CDS)• covenants• diversification (portfolio of credits)
credit policy
• rules of credit/borrowing• driven by risk appetite• credit acceptance rules/process• quality of customer/borrower (credit scoring)• terms of trade (e.g. 7,14,30 days)• lenders: interest rate policy• lenders: security and collaterals• credit risk department separated form sales
credit rating
• estimation of credit worthiness• ability of debt repayment by potential borrower• credit rating assigned to:– private individual– security (e.g. bond, derivative)– security issuer (e.g. corporation, government,
municipalities, SPV, NGO)• provided by credit bureau / rating agency
7
what the rating is?
personal rating
credit bureau
10
credit bureau
• credit bureau / consumer credit reporting agency (UK)
• target private individuals• evaluation made on overall credit history and current
assets and liabilities• data collected from credit institutions (banks, credit
unions, corporations)• users of rating pays for rating
11
criteria for private credit score
• debt• usage of credit lines (i.e. credit cards)• ability to pay a loan• saving patterns• spending patterns• interest• other (equality issues)
12
FICO credit score formula
FICO rating scale
corporate and sovereign rating
rating agency
• assigns credit ratings for issuers of certain types of debt obligations
• target non-individuals: enterprises, organisations and governments
• evaluation made on company data (annual/quarterly reports)
• analysis of company statement using financial analysis tools and methods
• short term and long term debt rating16
rating agencies
17
rating agencies criticism
• not downgraded companies promptly enough• too familiar relationship with rated company
management• payment model – rating is paid by rated institution• errors of judgment in rating structured products• oligopoly allegations
20
risk based pricing
23
credit insurance/credit derivatives
covenants
• monitoring e.g. regular reports and audits• refrain from paying dividends or other actions• limit the borrower’s ability to borrow further money• repayment of the loan if specified events occur• repayment of the loan when agreed financial ratio
reach particular level
diversification (portfolio of credits)