Unlike centuries ago, wherein banks operated only within the country, banking today is an international operation. Thus, different banking firms are able to merge with one another, and more business establishments seem to be given greater ways for financing their activities through the banks. However, along with this increase of banking operations and capabilities, demand for a decrease in “financial risks” is getting higher as well. Therefore, in order to assure any financial disasters that will surely bring great problems both to the customer and the banking service provider itself, banks should increasingly get “engaged in ‘risk shifting’ activities” (Crouhy, Galai & Mark, 2000). This will be the focus of this paper.
Buy Risk Management essay paper online
One particular risk in banking is what we call “credit risk”. Traditionally, banks are supposed to diligently assess every credit proposal of customers to find out whether there is high possibility of success in the customer’s project/business or not (Gosh, 2012). Banks should, at least, have three things about the customer’s business that need to be collected and analyzed before approval of any credit proposal. The three include societal background and the market status; the technical feasibility and marketability; and the financial standing of the customer to see if the customer is financially viable (Gosh, 2012). Failure in considering these things leads to inefficient lending policy of the bank, taking the risk of having not profitable and fruitful operations. Sadly, there are banking factors, such as lack of diligence in monitoring credit leads, laxity in credit supervision, absence of credit audit mechanism, wrong deployment of funds and some others, that lead banks to credit risks. Nevertheless, there is a primary tool used for credit risk management which is the “Credit Risk Rating” (CCR). The principle of CRR is related with bank’s risk management philosophy, risk policy, and business strategies, since “the risk-grade position of total credit exposure shown be known for managing credit risk” (Gosh, 2012). One implementation of the CRR is the selection of credit borrowers. The lending policy of a particular bank should have specific standards for selection of those who will borrow money from it. As mentioned earlier, banks are to collect information about a customer during the credit proposal in order to assess if the customer will be approved for it. High credit risks happen when banks adversely select borrowers. For instance, one thing banks assess in borrowers is their income. To rate whether a borrower is viable to be granted a credit from the bank, their income will be used for assessment. If the income is quite low for the standards included in the lending policy, then the borrower will certainly not be able to have the credit proposal approved. The implementation of rating the borrowers during the initial process of the credit proposal will greatly decrease the possibility of wrong selection of borrowers, having certain quality of credit selection within the bank’s organization (Gosh, 2012).
Another implementation of the CRR tool is in assessing credit concentration. Concentration risk refers to “the discrepancies of sizes and the presence of large exposures” (Florez & Bessis, 2011). There are some instances that economic slowdowns occur in the global market. Such event most likely leads to large losses. But credit concentration in any business operations may not be threatening in every situation. Thus, for assessment of credit risk, banks should have necessary tool and process for measuring the extent and intensity of risk from concentration in any portfolio (Gosh, 2012). This is where CRR suits well. The implementation of risk rating to every borrower in a credit portfolio where concentration exists will show the overall quality of that particular portfolio (Gosh, 2012). Borrowers rated with low- and moderate-risk exposures will be considered healthy for the credit proposition. With such technique and implementations, banks will be able to identify well-qualified borrowers, thus, decreasing the risk of wrong approval of credit proposals and wasteful lending of money.
Related Free Analytical Essays
- Business Plan Report
- Internet Risks: E-Commerce, Social Networking, and Identity Theft
- SCRUTINISING A CSR REPORT: BP GLOBAL
- The Coca-Cola Case
- Research Project and Rhetorical Analysis
- Carnegie Mellon Business and Computer Science College
- Fashion Marketing
- Consumer Trends
- Popular Culture Analysis
- Increasing Marginal Cost