TODAYS LECTURE WITH SOPHOMORE 09 05 16

TODAYS LECTURE WITH SOPHOMORE 09 05 16 - Unit 6 SPECIFIC...

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Unit. 6 SPECIFIC STUDIES OF DIFFERENT RISKS IN RISK MANAGEMENT Section I. CREDIT RISK Credit risk is the possibility of loss from the failure of loan or debt instrument repayments . It indicates the change in the repayment capacity of borrowers or debt instruments that indicates possible failure by bank borrowers. Credit risk is affected by bank specific internal factors or external factors such as changes in the economy. Internal risk factors can be managed by adopting a systematic credit risk management policy and procedure. Managing external factors involves diversification of credit among different industry groups and different borrowers. Banks have several choices regarding the model for credit risk computation. Certain popular models in use are Altman’s model , credit metrics model , value at risk model and KMV model . Depending on the suitabilit y and the requirements of banks a model can be chosen and adopted for credit risk measurement.The main ai m of credit risk management is not only quantifying risk but also reducing exposure of credit risk by adoptin g safety measures through collateral securities, guarantees, credit derivatives and balance sheet netting.
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Banks represent credit risk through rating systems.
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