| The importance of credit risk management for | | | | and to maintain its economic stability. The second |
| banking is tremendous. Banks and other financial | | | | Basel Accords provides statements of its rules |
| institutions are often faced with risks that are mostly | | | | regarding the regulation of the bank's capital allocation |
| of financial nature. These institutions must balance | | | | in connection with the level of risks the bank is |
| risks as well as returns. For a bank to have a large | | | | exposed to. The greater the bank is exposed to |
| consumer base, it must offer loan products that are | | | | risks, the greater the amount of capital must be |
| reasonable enough. However, if the interest rates in | | | | when it comes to its reserves, so as to maintain its |
| loan products are too low, the bank will suffer from | | | | solvency and stability. To determine the risks that |
| losses. In terms of equity, a bank must have | | | | come with lending and investment practices, banks |
| substantial amount of capital on its reserve, but not | | | | must assess the risks. Credit risk management must |
| too much that it misses the investment revenue, and | | | | play its role then to help banks be in compliance with |
| not too little that it leads itself to financial instability | | | | Basel II Accord and other regulatory bodies. |
| and to the risk of regulatory non-compliance. | | | | To manage and assess the risks faced by banks, it is |
| Credit risk management, in finance terms, refers to | | | | important to make certain estimates, conduct |
| the process of risk assessment that comes in an | | | | monitoring, and perform reviews of the performance |
| investment. Risk often comes in investing and in the | | | | of the bank. However, because banks are into lending |
| allocation of capital. The risks must be assessed so | | | | and investing practices, it is relevant to make reviews |
| as to derive a sound investment decision. Likewise, | | | | on loans and to scrutinize and analyse portfolios. Loan |
| the assessment of risk is also crucial in coming up | | | | reviews and portfolio analysis are crucial then in |
| with the position to balance risks and returns. | | | | determining the credit and investment risks. |
| Banks are constantly faced with risks. There are | | | | The complexity and emergence of various securities |
| certain risks in the process of granting loans to | | | | and derivatives is a factor banks must be active in |
| certain clients. There can be more risks involved if | | | | managing the risks. The credit risk management |
| the loan is extended to unworthy debtors. Certain | | | | system used by many banks today has complexity; |
| risks may also come when banks offer securities and | | | | however, it can help in the assessment of risks by |
| other forms of investments. | | | | analysing the credits and determining the probability |
| The risk of losses that result in the default of | | | | of defaults and risks of losses. |
| payment of the debtors is a kind of risk that must | | | | Credit risk management for banking is a very useful |
| be expected. Because of the exposure of banks to | | | | system, especially if the risks are in line with the |
| many risks, it is only reasonable for a bank to keep | | | | survival of banks in the business world. |
| substantial amount of capital to protect its solvency | | | | |