德勤信用风险管理课件

CreditRiskManagement

EnhancingYourBottomLineEbrahimShabudinManagingDirectorDeloitte&ToucheLLPTheAFP23rdAnnualConferenceNewOrleansNovember3-6,2002​CreditRiskManagement

Enhanci1CreditBackgroundThoroughidentificationandaccuratemeasurementofcreditrisk,supportedbystrongriskmanagementcanhelpimprovethebottomline…..Anuncertainandvolatileeconomic environmentsignificantlyimpactsthisability…..Thedesiretogrowandturninoutstanding resultshasatendencytoputpressureonthe checksandbalanceswithinbusinesses​CreditBackgroundThoroughiden2ValuePropositionCreditplaysacriticalrolein“selling”productsandservicesExpandsrevenueopportunitieswithcreditworthy,incrementalcustomersUtilizesinnovativestructurestosupportbusinessrelationshipsEffectivecreditriskmanagementlimitscreditlossesandprovidesstablecashflowsandearningsMarketplacerewardscompaniesexhibitingearningsandcashflowstabilitywithhigherP/EmultiplesMarketplacepenalizescreditinducedvolatilityand“surprises”Raisesquestionsaboutqualityofmanagement​ValueProposition​3CorporateCreditRiskCompaniesareexposedtosignificantlevelsofcreditriskemanatingfromdifferentsourcesAccountsReceivablesOtherNotesReceivablesBuyerandFranchiseFinancingWithRecourseFinancingProjectFinanceStructuredTransactionsLeaseswithRecourseDerivativesExposuresFX,InterestRateRisk,Commoditiesetc.CollateralRiskParentorThirdPartyGuaranteesCommercialandStandbyLettersofCreditNotealsothatCriticalSupplierstothecompanymayposespecificcreditrisk​CorporateCreditRiskCompanies4DSOImpact…anexampleActualCompanyAPeerAverageQ3A/R$295,396,000Q3Sales$261,201,000\DSOs=124*51.3HypotheticalDCashDSOs51.3Q3Sales$261,201,000\Q3A/R=$122,002,230+$173,393,770*Equals295.4M/261.2Mx90(ornumberofdaysinsalesperiod)​DSOImpact…anexampleActualC5CreditasaFacilitatorCreditriskmanagementisimportant

CreditisafacilitatorofbusinessgrowthandperformanceHighbusinessmarginstendtoattractlowerqualityclientsandthereforehigherriskprofiletomanageClients(buyers)maybeconcentratedinselectedindustriesandprovidelimitedportfoliodiversificationopportunityPoorcreditriskmanagementresultinginnegativeimpacttobottom-lineisheavilypenalizedbymarkets​CreditasaFacilitatorCredit6CreditStrategy&RiskToleranceSpecificQuantifiableObjectivesManagementReviewMethodologyCreditStrategyStatementandRiskToleranceCoordinationwithBusinessPlanThebusinessstrategiesandobjectivesdrivetheestablishmentofcreditpoliciesandprocedures.Measurementandreportingaswellastheuseofcurrenttechnologiesenhancecreditdecision-makingandimproveriskmanagement.Theentireprocessiscontinuallyre-evaluatedandimproved.​CreditStrategy&RiskToleran7CreditRiskAreastoConsiderCreditPolicyCreditApprovalAuthorityLimitSettingPricingTermsandConditionsDocumentation:ContractsandCovenantsCollateralandSecurityCollections,DelinquenciesandWorkoutsExposureManagementAggregationControlPeriodicAccountReviewsPayments/AgingCreditConditionCompliancewithCovenants,TermsTechnology/ReportsTransactions/BookingsRisk-adjustedReturnSalesChannelsRiskStrategyUnderwritingStandardsCreditApplicationAnalysisBusiness/IndustryFinancialCreditCreditScoringandRatingsOrigination/AssessmentAdministrationMonitoring/ControlRiskManagementPortfolioManagementConcentrationDiversificationAllowanceforBadDebtsRiskMitigationObjectivesTypeofExposureInstrumentsorMethods​CreditRiskAreastoConsiderC8ValueCreationBusinessPerformanceMeasuresOrganizationsneedarigoroussetofmeasurestosupportcontinuousimprovementPerformance-basedmanagementutilizesmetricsthatmeasureactualperformanceagainstpredeterminedthresholds.Thethresholdsareestablishedtakingintoaccounttheorganization’sstrategy,operatingenvironmentandprocesscontrols.Themeasuresdrivevaluecreationandshouldsupportproblemidentificationandcorrection.BusinessStrategySystemsOperationsFinancePerformanceManagement​ValueCreationBusinessPerform9SaleschannelsContracts&DocumentationCreditanalysisCreditlimitPricing&termsCreditAnalysisCreditDecisionsCollectionsCREDITPOLICYCollateralacceptancePortfoliomanagementFinancialanalysisDisposal/

RiskmitigationCollateralmanagementCustomermanagementExposuremeasurementManagementreportingExposureaggregationRecoveriesCreditscoringRiskratingRISKMANAGEMENTCreditRiskManagement’sInter-relatedActivitiesComplianceOriginationReportingTransactions​SaleschannelsContracts&Docu10CreditPolicies

&Procedures

Analysis&RiskManagementGovernance,ControlandImplementation

MeasurementMethodologiesTechnology&DataIntegrityCreditStrategy&RiskTolerance

AcompleteandcoherentriskmanagementframeworkcontainsthefollowingelementsCreditRiskManagement​CreditPolicies

&Procedures11ANewParadigmAnewbusinessparadigmhadevolved:causingalackofrelianceongoodfundamentalanalysisTheideathatstockmarketvalueswouldcontinuetogoupindefinitelyIncreasinglycompetitive,complexandvolatilemarketplaceHigherthanexpectedactualdebtburdensExtensiverelianceonunrealisticfuturecashflowsFailuresincorporategovernanceQuestionablepersonalandcorporateethics​ANewParadigmAnewbusinessp12ImplicationsforCorporateGovernanceCurrentorganizationstructurestoberevisitedClarityaroundrolesandresponsibilitiesNeedforhonesty,integrityandindependence(self-regulation)TechnicalexpertiseofpeopleandstrongmanagementprocessesImproveddisclosurerequirementsImportanceandimplementationofsanctionsIncreasedlegislationandcompliancerequirements​ImplicationsforCorporateGov13Foundation:CreditRatingandUnderwritingStandardsRiskIdentification,Origination,CreditAdministration,etc.ShortTerm:ManagingExpectedLossRiskIdentification,Transaction

Structuring,Approval&PricingDecisions,Reserving,etc.NearTerm:ManagingEconomicCapital/CreditVaRPortfolioRiskConcentration,RiskBasedLimits,etc.

Vision: ManagingRisk/ReturnPricingdecisions,Performancemeasurement,businessandcustomersegmentation,compensation,etc.AbusinessmodelviewofCreditRiskInfrastructurecomponentsCreditRiskManagement–StrategicVision​Foundation:CreditRatingand14DevelopmentStagesFoundationStageincludesapplicationofriskidentificationmethodologies,riskscoringorratingsystemsandstrongunderwritingstandards

BasicStagetendstoincludemanagingonatransactionalbasisbyevaluatingspecificattributessuchasstructuring,collateralandpricing

AdvancedStagerepresentsmanagingonaportfoliobasisincludingaspectssuchasconcentrations,correlationsanddiversification

TheSophisticatedStageincludesapplicationofhighlydevelopedmeasurementtechniquesfortransactionsandportfolios,supportedbydecision-makingrelatingtosegmentsorbusinessesagainstestablishedhurdlerates.​DevelopmentStagesFoundationS15CreditRiskClarified

Creditriskisdefinedastheriskoflossorpotentiallossresultingfrom:DefaultincontractualobligationsbyacustomerMigrationinconditionandratingDeteriorationinperformance

Creditriskincludesbothanexpected(predictable)andunexpected(volatile)losscomponent.

​CreditRiskClarified Creditr16BusinesseshavetocontendwithExpectedandUnexpectedLossesExpectedLossesAnticipatedCostofdoingbusinessChargedtoprovisionsCapturedinpricingRelativelyeasiertomeasureAssessingexpectedlossincludesdeterminingexposure,defaultprobabilityandseverityUnexpectedLossesUnanticipatedbutinevitableMustbeplannedforCoveredbyreservesAllocatedtobusinessesDifficulttomeasureAssessingunexpectedlossrequiresmakingqualitativejudgmentsaroundpotentialvolatilityofaveragelosses​Businesseshavetocontendwit17CreditRiskManagementExplainedAlthoughcreditriskmaybedifficulttomeasureitisimportanttoestimateandmanage

WhatdoesCreditRiskManagementmean?Itrepresentsaninstitution’sabilitytoproperlyidentifyandevaluatethepotentialriskofdefaultinpaymentofobligationsofcustomersItincorporatesthefirm’sabilitytoeffectivelymanageandcontrolthisexposureinawaythatisconsistentwiththeinstitution’sbusinessstrategy,riskappetiteandcreditculture​CreditRiskManagementExplain18ImportantBuildingBlocksEffectiveCreditRiskManagementrequiresClearoriginationandunderwritingstandardsAstrongcorporateandcreditcultureHighlydevelopedriskmeasurementtechniquesAbilitytorecognizeandcoverexpectedandunexpectedlossesPricingcommensuratewithrisksundertakenMethodologiestoassessnetprofitcontributionsbycustomersandappropriatebusinesssegmentsProperallocationofcapitalandmanagementresourcesInorderto:Improveoverallcorporateperformance,measuredbyahigherEPSorP/Eratio(ormarketvalue)​ImportantBuildingBlocksEffec19CreditPolicyandProcessCreditPolicyshouldbeclearandconciseCreditUnderwritingStandardsmustbedevelopedandincludedinpolicyCreditProcessesshouldbereasonableandallowquickresponsetoclientsHealthybalancebetweensalesandcreditapprovalshouldexistandberespected​CreditPolicyandProcessCredi20RiskMonitoringExposuremustbecompleteandcurrentRegularreportingandupdatingofclients’paymentperformanceMinimumannualreviewsofclientsshouldbeperformedFinancialconditionsshouldberegularlyassessedRequiredactionmustbeinitiatedandfollowupmusttakeplace​RiskMonitoringExposuremustb21ContractTermsandDocumentationContractnegotiationsmusttakeplaceattherightlevelintheorganizationAppropriateapprovalsmustbeobtainedInternalorexternallegaldepartmentsmustdocumentcompletelyTermsandconditionsshouldbeunderstoodandcompliancemechanismputinplaceExceptionsmustbereportedandmanagedurgentlytoresolution​ContractTermsandDocumentati22RiskRatingSystemEffectivenessCreditScoringisgenerallyusedto“riskrate”homogeneousportfoliosHighestapplicabilityisinconsumerandretailportfoliosSomeadvancedscoringsystemsarebeingmigratedforuseinrating“middlemarket”clientsSuchmodelsareonlyasgoodastheunderlyingassumptions InternalcreditratingsystemsaredifficulttoassessandareoftennotindependentlyvalidatedClientrelationshipmayinterferewithobjectiveassessmentofrisksRatingcriteriausuallyamatterofpracticeratherthanwrittenpolicyRatingsarenotconsistentovertimeQualitativecreditassessmentsoftenlagcurrentmarketinformationInstitutionsoftenassume

amappingwithexternalratingsinordertoquantifycreditrisk​RiskRatingSystemEffectivene23EffectiveRiskRatingSystemsSufficientgranularityofriskratingcategoriesAccurateandtimelyassignmentofratings

ClearandconsistentapplicationofdefaultdefinitionPeriodiccalibration,triangulationandvalidationofriskratingsAccurateidentificationofmigrationoftransactionsandportfolios(asreflectedbyupgradesanddowngradesinratings)​EffectiveRiskRatingSystemsS24CreditEvaluation:FinancialFactorsGettheinformationyouneedtomakeafullanalysisSomeinformationwillneedtobecross-checkedandobtainedonaregularandtimelybasisBeconstructivelycynical:newbusinessmodelsaredifficulttopulloffBecognizantofdelayingtacticsNumbersdon’ttellthewholestory!​CreditEvaluation:FinancialF25CreditEvaluation:QualitativeFactorsEvaluationofsubjectivefactorsisoftentimesmoreimportantthanthenumericalanalysisPeoplemakeabusiness:visions,valuesandstrategiesareonlywordsunlesspeopleimplementthemManagement,industry,product,geography,competitionetc.allinfluenceresultsandmustbeproperlyassessedAnalysis-paralysismayleadtowrongdecisions​CreditEvaluation:Qualitative26ArtandScienceofJudgmentGettingaccesstothebestclientsandalltherelevantinformationisachallengeEnsuringproperanalysisisdonerequiresastrongcorporatecultureUtilizingqualifiedresourcesbothinternallyandexternallyenhancestheresultsOftenthelackofthewilltoactiswhatcauseshighlosses​ArtandScienceofJudgmentGet27ConcludingCommentsCompaniesthatmeasureandmanagecreditriskinapro-activemannerwillbenefitfromafavorableriskprofileresultinginHigherrevenueLowerlossesImprovedefficienciesHigherEPS,P/Eratiosandmarketvalues​ConcludingCommentsCompaniest28ConcludingCommentsRiskAssessmentandLimitManagementCreditInfrastructureandPortfolioManagementCreditAnalyticsSupportCreditTechnologyEnablementCreditQualityCreditUnderwritingRiskRatingSystemEffectivenessCounterpartyandPortfolioLimitsOrganizationalStructurePoliciesandProceduresTechnologySelectionandImplementationProblemAssetManagementRiskRatingCalibrationTransactionPricing,StructureandSupportDefaultProbabilityandRecoveryCalibrationCreditReserveMethodologyRiskBasedPricingModelsRiskAdjustedReturnAnalysisPortfolioValueMeasurementCreditRiskMeasurementCreditPerformanceScorecards

InternalSoftware

ExternalVendorSoftware​ConcludingCommentsRiskAssess29Appendix:BusinessProposalChecklistBusinessProposalSummaryCustomer,Rating,LegalStatus,LineofBusinessGuarantor,ifany…sameCollateral,ifany…truevalueexplainedOtherSupport,ifany...LegalormoralonlyTheTransaction…risksandmitigationAmount,purpose,termsandconditionsSourcesofrepayment…clearlyidentifiedClientpaymenthistoryandrelationship​Appendix:BusinessProposalCh30Appendix:BusinessProposalChecklistRationaleandAnalysisCustomer,Guarantor,Collateral,SupportFacilityDescriptionAmount,purpose,tenor,pricing,terms,conditions,covenants,restrictionsetc.Consideraffectonabovee.g.newleverageFacilityRating?RepaymentCapacityFuturecashflow,conversionofassetsetc.ConsistencywithCreditStrategyandPolicyConfirm,andidentifyanyexceptionstopolicy,underwritingstandards,orprocessRiskadjustedreturnacceptability​Appendix:BusinessProposalCh31Appendix:BusinessProposalChecklistClientRelationshipBusinessstrategy:increase,maintainordecreaseexposureorexitrelationshipConsiderrelationtorating,latestriskprofileandpaymentperformanceCustomerprofitability:riskadjustedreturn,revenue,fees,directandallocatedcostsetc.Anyconflictsofinterestorspecialconcerns​Appendix:BusinessProposalCh32Appendix:BusinessProposalChecklistMacroAnalysisBusinessEnvironmentReviewCustomer’scompetitivemarketpositionandfutureindustryprospects:size,cycle,volatility,newentrantsStrengthofcustomer’sbusinessandfinancialstrategiesManagementEvaluation:competency,experienceandeffectiveness​Appendix:BusinessProposalCh33Appendix:BusinessProposalChecklistCustomerAnalysisCompanyhistory,background,objectivesandperformanceRelevanceandstrengthoffuturebusinessplansConsiderseasonalityandscenarioanalysisPrimaryandsecondarysourcesofrepaymentHistoricalfinancialcapacityandanalysisoffutureperformance:sales,profitability,workingcapital,liquidity,cashflow,leverage,tangiblenetworthetc.QualityofearningsAbsoluteandratioanalysisPeercomparisons​Appendix:BusinessProposalCh34Appendix:BusinessProposalChecklistStrengths,WeaknessesandRecommendationKeyfactorsthatcouldjeopardizecollection:environmentorcompanyspecificAnymitigatingfactorsConsiderprobabilityandimpactConsiderallsourcesofrepayment:primary,secondaryandtertiary,includingaccesstocapitalmarkets,refinancingetc.Summarizestrengthsandweaknessesandconcludewitharecommendation​Appendix:BusinessProposalCh35我们的承诺：不做不良品。11月-2211月-22Thursday,November3,2022为别人鼓掌的人,才能赢得别人的鼓掌。20:58:5320:58:5320:5811/3/20228:58:53PM入海之前先探风，上岗之前先练功。11月-2220:58:5320:58Nov-2203-Nov-22安全是一切工作的最优环境。20:58:5320:58:5320:58Thursday,November3,2022素质提升，交流分享，精耕深耕，永续辉煌。11月-2211月-2220:58:5320:58:53November3,2022您的自觉贡献，才有公司的辉煌。2022年11月3日8:58下午11月-2211月-22品质你我都做好，顾客留住不会跑。03十一月20228:58:53下午20:58:5311月-22以工作的品质，提升产品品质。十一月228:58下午11月-2220:58November3,2022安全、节能、高效、优质。2022/11/320:58:5320:58:5303November2022贯标出质量，认证树形象。8:58:53下午8:58下午20:58:5311月-22违章蛮干铸成终身遗憾，遵章守纪伴你一生平安。11月-2211月-2220:5820:58:5320:58:53Nov-22各自做好本职工作，就生产出好产品。2022/11/320:58:53Thursday,November3,2022儿行千里母担忧，夫婿在岗妻惦念。11月-222022/11/320:58:5311月-22谢谢大家！我们的承诺：不做不良品。11月-2211月-22Wednes36CreditRiskManagement

EnhancingYourBottomLineEbrahimShabudinManagingDirectorDeloitte&ToucheLLPTheAFP23rdAnnualConferenceNewOrleansNovember3-6,2002​CreditRiskManagement

Enhanci37CreditBackgroundThoroughidentificationandaccuratemeasurementofcreditrisk,supportedbystrongriskmanagementcanhelpimprovethebottomline…..Anuncertainandvolatileeconomic environmentsignificantlyimpactsthisability…..Thedesiretogrowandturninoutstanding resultshasatendencytoputpressureonthe checksandbalanceswithinbusinesses​CreditBackgroundThoroughiden38ValuePropositionCreditplaysacriticalrolein“selling”productsandservicesExpandsrevenueopportunitieswithcreditworthy,incrementalcustomersUtilizesinnovativestructurestosupportbusinessrelationshipsEffectivecreditriskmanagementlimitscreditlossesandprovidesstablecashflowsandearningsMarketplacerewardscompaniesexhibitingearningsandcashflowstabilitywithhigherP/EmultiplesMarketplacepenalizescreditinducedvolatilityand“surprises”Raisesquestionsaboutqualityofmanagement​ValueProposition​39CorporateCreditRiskCompaniesareexposedtosignificantlevelsofcreditriskemanatingfromdifferentsourcesAccountsReceivablesOtherNotesReceivablesBuyerandFranchiseFinancingWithRecourseFinancingProjectFinanceStructuredTransactionsLeaseswithRecourseDerivativesExposuresFX,InterestRateRisk,Commoditiesetc.CollateralRiskParentorThirdPartyGuaranteesCommercialandStandbyLettersofCreditNotealsothatCriticalSupplierstothecompanymayposespecificcreditrisk​CorporateCreditRiskCompanies40DSOImpact…anexampleActualCompanyAPeerAverageQ3A/R$295,396,000Q3Sales$261,201,000\DSOs=124*51.3HypotheticalDCashDSOs51.3Q3Sales$261,201,000\Q3A/R=$122,002,230+$173,393,770*Equals295.4M/261.2Mx90(ornumberofdaysinsalesperiod)​DSOImpact…anexampleActualC41CreditasaFacilitatorCreditriskmanagementisimportant

CreditisafacilitatorofbusinessgrowthandperformanceHighbusinessmarginstendtoattractlowerqualityclientsandthereforehigherriskprofiletomanageClients(buyers)maybeconcentratedinselectedindustriesandprovidelimitedportfoliodiversificationopportunityPoorcreditriskmanagementresultinginnegativeimpacttobottom-lineisheavilypenalizedbymarkets​CreditasaFacilitatorCredit42CreditStrategy&RiskToleranceSpecificQuantifiableObjectivesManagementReviewMethodologyCreditStrategyStatementandRiskToleranceCoordinationwithBusinessPlanThebusinessstrategiesandobjectivesdrivetheestablishmentofcreditpoliciesandprocedures.Measurementandreportingaswellastheuseofcurrenttechnologiesenhancecreditdecision-makingandimproveriskmanagement.Theentireprocessiscontinuallyre-evaluatedandimproved.​CreditStrategy&RiskToleran43CreditRiskAreastoConsiderCreditPolicyCreditApprovalAuthorityLimitSettingPricingTermsandConditionsDocumentation:ContractsandCovenantsCollateralandSecurityCollections,DelinquenciesandWorkoutsExposureManagementAggregationControlPeriodicAccountReviewsPayments/AgingCreditConditionCompliancewithCovenants,TermsTechnology/ReportsTransactions/BookingsRisk-adjustedReturnSalesChannelsRiskStrategyUnderwritingStandardsCreditApplicationAnalysisBusiness/IndustryFinancialCreditCreditScoringandRatingsOrigination/AssessmentAdministrationMonitoring/ControlRiskManagementPortfolioManagementConcentrationDiversificationAllowanceforBadDebtsRiskMitigationObjectivesTypeofExposureInstrumentsorMethods​CreditRiskAreastoConsiderC44ValueCreationBusinessPerformanceMeasuresOrganizationsneedarigoroussetofmeasurestosupportcontinuousimprovementPerformance-basedmanagementutilizesmetricsthatmeasureactualperformanceagainstpredeterminedthresholds.Thethresholdsareestablishedtakingintoaccounttheorganization’sstrategy,operatingenvironmentandprocesscontrols.Themeasuresdrivevaluecreationandshouldsupportproblemidentificationandcorrection.BusinessStrategySystemsOperationsFinancePerformanceManagement​ValueCreationBusinessPerform45SaleschannelsContracts&DocumentationCreditanalysisCreditlimitPricing&termsCreditAnalysisCreditDecisionsCollectionsCREDITPOLICYCollateralacceptancePortfoliomanagementFinancialanalysisDisposal/

RiskmitigationCollateralmanagementCustomermanagementExposuremeasurementManagementreportingExposureaggregationRecoveriesCreditscoringRiskratingRISKMANAGEMENTCreditRiskManagement’sInter-relatedActivitiesComplianceOriginationReportingTransactions​SaleschannelsContracts&Docu46CreditPolicies

&Procedures

Analysis&RiskManagementGovernance,ControlandImplementation

MeasurementMethodologiesTechnology&DataIntegrityCreditStrategy&RiskTolerance

AcompleteandcoherentriskmanagementframeworkcontainsthefollowingelementsCreditRiskManagement​CreditPolicies

&Procedures47ANewParadigmAnewbusinessparadigmhadevolved:causingalackofrelianceongoodfundamentalanalysisTheideathatstockmarketvalueswouldcontinuetogoupindefinitelyIncreasinglycompetitive,complexandvolatilemarketplaceHigherthanexpectedactualdebtburdensExtensiverelianceonunrealisticfuturecashflowsFailuresincorporategovernanceQuestionablepersonalandcorporateethics​ANewParadigmAnewbusinessp48ImplicationsforCorporateGovernanceCurrentorganizationstructurestoberevisitedClarityaroundrolesandresponsibilitiesNeedforhonesty,integrityandindependence(self-regulation)TechnicalexpertiseofpeopleandstrongmanagementprocessesImproveddisclosurerequirementsImportanceandimplementationofsanctionsIncreasedlegislationandcompliancerequirements​ImplicationsforCorporateGov49Foundation:CreditRatingandUnderwritingStandardsRiskIdentification,Origination,CreditAdministration,etc.ShortTerm:ManagingExpectedLossRiskIdentification,Transaction

Structuring,Approval&PricingDecisions,Reserving,etc.NearTerm:ManagingEconomicCapital/CreditVaRPortfolioRiskConcentration,RiskBasedLimits,etc.

Vision: ManagingRisk/ReturnPricingdecisions,Performancemeasurement,businessandcustomersegmentation,compensation,etc.AbusinessmodelviewofCreditRiskInfrastructurecomponentsCreditRiskManagement–StrategicVision​Foundation:CreditRatingand50DevelopmentStagesFoundationStageincludesapplicationofriskidentificationmethodologies,riskscoringorratingsystemsandstrongunderwritingstandards

BasicStagetendstoincludemanagingonatransactionalbasisbyevaluatingspecificattributessuchasstructuring,collateralandpricing

AdvancedStagerepresentsmanagingonaportfoliobasisincludingaspectssuchasconcentrations,correlationsanddiversification

TheSophisticatedStageincludesapplicationofhighlydevelopedmeasurementtechniquesfortransactionsandportfolios,supportedbydecision-makingrelatingtosegmentsorbusinessesagainstestablishedhurdlerates.​DevelopmentStagesFoundationS51CreditRiskClarified

Creditriskisdefinedastheriskoflossorpotentiallossresultingfrom:DefaultincontractualobligationsbyacustomerMigrationinconditionandratingDeteriorationinperformance

Creditriskincludesbothanexpected(predictable)andunexpected(volatile)losscomponent.

​CreditRiskClarified Creditr52BusinesseshavetocontendwithExpectedandUnexpectedLossesExpectedLossesAnticipatedCostofdoingbusinessChargedtoprovisionsCapturedinpricingRelativelyeasiertomeasureAssessingexpectedlossincludesdeterminingexposure,defaultprobabilityandseverityUnexpectedLossesUnanticipatedbutinevitableMustbeplannedforCoveredbyreservesAllocatedtobusinessesDifficulttomeasureAssessingunexpectedlossrequiresmakingqualitativejudgmentsaroundpotentialvolatilityofaveragelosses​Businesseshavetocontendwit53CreditRiskManagementExplainedAlthoughcreditriskmaybedifficulttomeasureitisimportanttoestimateandmanage

WhatdoesCreditRiskManagementmean?Itrepresentsaninstitution’sabilitytoproperlyidentifyandevaluatethepotentialriskofdefaultinpaymentofobligationsofcustomersItincorporatesthefirm’sabilitytoeffectivelymanageandcontrolthisexposureinawaythatisconsistentwiththeinstitution’sbusinessstrategy,riskappetiteandcreditculture​CreditRiskManagementExplain54ImportantBuildingBlocksEffectiveCreditRiskManagementrequiresClearoriginationandunderwritingstandardsAstrongcorporateandcreditcultureHighlydevelopedriskmeasurementtechniquesAbilitytorecognizeandcoverexpectedandunexpectedlossesPricingcommensuratewithrisksundertakenMethodologiestoassessnetprofitcontributionsbycustomersandappropriatebusinesssegmentsProperallocationofcapitalandmanagementresourcesInorderto:Improveoverallcorporateperformance,measuredbyahigherEPSorP/Eratio(ormarketvalue)​ImportantBuildingBlocksEffec55CreditPolicyandProcessCreditPolicyshouldbeclearandconciseCreditUnderwritingStandardsmustbedevelopedandincludedinpolicyCreditProcessesshouldbereasonableandallowquickresponsetoclientsHealthybalancebetweensalesandcreditapprovalshouldexistandberespected​CreditPolicyandProces