Ch 11 fully revised 2011

Ch 11 fully revised 2011 - 1 Chapter 11 Credit Risk:...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 11 Credit Risk: Individual Loan Risk 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Overview This chapter discusses types of loans, and the analysis and measurement of credit risk on individual loans. This is important for purposes of: Pricing loans and bonds. Setting limits on credit risk exposure h Setting limits on the amount of credit extended to any one borrower or the loss exposure it accepts from any particular counterparty (includes loans and off balance sheet guarantees such as loan commitments and standby letters of credit). h Sometimes the limit is set as zero (i.e., the borrower’s credit application is rejected). 2
Background image of page 2
Credit Quality Problems Over the past 2 decades the credit quality problems of many FIs attracted a lot of attention: Problems with junk bonds, LDC loans, farm mortgage loans. Crises in Asian countries such as Korea, Indonesia, Thailand, and Malaysia. In recent crisis, credit card loans, auto loans, residential real estate loans, particularly subprime mortgages. 3
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Credit Quality Problems Over the early to mid-1990s, there were improvements in NPLs for large banks and overall credit quality. NPL means nonperforming loans (delinquent at least 90 days or nonaccrual). Late 1990s: concern over growth in low quality auto loans and credit cards, decline in quality of lending standards. Late 1990s and early 2000s: tech bubble bursts, Argentina, Brazil, Russia, South Korea. Mid 2000s, economic growth was accompanied by reduction in NPLs. Late 2000s, there was the subprime loan crisis and recession. 4
Background image of page 4
Nonperforming Asset Ratios for U.S. Banks 5 Ratios went up for all types of loans in recent crisis, worst for real estate (started before the crisis). Not the first time for real estate loans but mortgages were more concentrated in savings associations in 1980s.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Types of U.S. Bank Loans, June 2009 (in billions of dollars 6
Background image of page 6
Types of Loans Loans to firms that are not secured by real estate. There is a great deal of heterogeneity in this type of loan (e.g., maturity, size, secured vs. unsecured, fixed vs. floating rates, spot loans vs. under loan commitments, etc.). Largest loans are often syndicated. In recent years there is a decline in C&I loans originated by commercial banks. h The major reason is the rise in nonbank loan substitutes such as commercial paper (less demand for bank loans). 7
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
However, only the largest corporations have access to the commercial paper market. Hence, banks are left with a pool of increasingly smaller and riskier borrowers. => Credit risk evaluation process becomes even more important. Commercial paper market froze up during the recent
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 31

Ch 11 fully revised 2011 - 1 Chapter 11 Credit Risk:...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online