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Credit Risk Management
The board of directors is responsible for overseeing the bank's credit risk strategy and policies. They should approve a credit risk strategy that defines the bank's risk appetite. Senior management is then responsible for implementing this strategy through establishing a sound credit granting and administration process. This includes setting credit policies, limits, and criteria and monitoring loans. An effective credit risk management system involves identifying, measuring, monitoring, and controlling credit risk, and includes internal risk ratings, management reporting, and independent credit reviews.
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Establishing credit risk policies and processes, roles of boards and senior management.
Establishing credit risk policies and processes, roles of boards and senior management.
Establishing credit risk policies and processes, roles of boards and senior management.
Establishing credit risk policies and processes, roles of boards and senior management.
Establishing credit risk policies and processes, roles of boards and senior management.
Establishing credit risk policies and processes, roles of boards and senior management.
Crafting credit policies focusing on target markets, portfolio mixes, approval limits, and collateral.
Crafting credit policies focusing on target markets, portfolio mixes, approval limits, and collateral.
Outlines business origination, credit analysis, approval functions, and importance of arm's length transactions.
Ensuring effective monitoring, compliance, risk rating systems, and stress testing for credit assessments.
Ensuring effective monitoring, compliance, risk rating systems, and stress testing for credit assessments.
Ensuring effective monitoring, compliance, risk rating systems, and stress testing for credit assessments.
Conducting independent credit reviews to evaluate credit administration, risk ratings and management oversight.
Credit Risk Management
- 2. Establishing anAppropriate Credit Risk Environment Operating Under a Sound Credit Granting Process Maintaining an Appropriate Credit Administration, Measurement and Monitoring Process Ensuring Adequate Controls over Credit Risk 2
- 3.
- 4. Credit risk ismost simply defined as the potential that a bank borrower will fail to meet its obligations in accordance with agreed terms. 4
- 6. Who has theresponsibility to oversee the credit risk strategy, including periodically reviewing the credit risk strategy and significant credit risk policies of the bank? 6
- 7.
- 8. The strategyshould include a statement of the bank’s willingness to grant credit based on type, economic sector, geographical location, currency, maturity and anticipated profitability. Strategy may also include financial goals of credit quality, earnings and growth. 8
- 9. What should the bank’sboard of directors do with the credit risk strategy? 9
- 10. Review financialresults of the bank to see if changes need to be made to the strategy. Ensure strategy is communicated throughout the bank. Review for compliance with strategy. 10
- 11. 11 What about SeniorManagement?
- 12. Senior managementshould have responsibility for implementing the credit risk strategy approved by the bank’s board of directors. 12
- 13. Identifying Measuring Monitoring Controlling 13
- 14. Management’s responsibilities includeensuring that: the bank’s credit-granting activities conform to the established criteria written procedures are developed and implemented loan approval and review responsibilities are clearly and properly assigned 14
- 15. Design ofa written loan policy 15
- 16. Credit policies shouldaddress: target markets portfolio mix price and non-price terms structure of limits approval authorities exception reporting 16
- 17. Banks should identifyand manage credit risk in all products and ensure the risks of new products to them are subject to adequate procedures and controls before being introduced and approved by the board of directors. 17
- 19. Bank should havea well-defined credit granting criteria that sets forth who is eligible for credit and how much, type available and terms. 19
- 20. Factors to beconsidered and documented in approving credits include: • the purpose of the credit and source of repayment • the current risk profile of the borrower and its sensitivity to economic and market developments • Repayment history and current capacity to repay • the proposed terms and conditions of the credit, including any covenants 20
- 21. for commercialcredits, the borrower’s business expertise and status of economic sector and position within that sector where applicable, the adequacy and enforceability of collateral or guarantees 21
- 22. Bank’s should establishcredit limits on single borrowers and groups of connected borrowers. 22
- 23. Limits shouldbe established for particular industries or economic sectors, geographic regions and specific products. Banks should monitor actual exposures against established limits Limits should not be binding and not driven by customer demand. 23
- 24. Steps in thecredit-granting process may include: Business origination function Credit analysis function Credit approval function 24
- 25. For processto work, all areas must work together Approvals should be made in accordance with bank’s guidelines and approved by the appropriate level of management 25
- 26. Credits should bemade on an arm’s length basis. Loans to related individual or companies must be monitored to mitigate risks of connected lending 26
- 27. Critical thatextensions of credit be made on established policies Directors, senior management and other influential parties should not seek to override established credit granting processes Extensions of credit should be subject to approval by board of directors 27
- 29.
- 30. Banks should ensure: ◦Efficiency and effectiveness in monitoring documentation, contractual requirements, legal covenants, collateral, etc. ◦ Accuracy and timeliness of information provided to management information systems. ◦ Adequacy of controls of “back office” procedures. ◦ Compliance with laws and internal policies. 30
- 31. Banks must havein place a system for monitoring the condition of individual credits, including determining the adequacy of provisions and reserves. 31
- 32. 32 What would beincluded in an effective credit monitoring system?
- 33. Understanding of borrower’scurrent financial condition Compliance with loan covenants Use of approved credit lines Projected cash flow meet debt servicing requirements Adequate collateral coverage Identification of problem credits 33
- 34. Banks should developand utilize internal risk rating systems in managing credit risk. The rating system should be consistent with the nature, size and complexity of a bank’s activities. 34
- 35. Internal risk ratings shouldbe responsive to indicators of potential deterioration in credit risk. 35
- 36. What is thecorrect number of credit categories that a bank’s loan portfolio should be broken into? 36
- 37. Frequency of creditreviews At credit inception During life of credit 37
- 38. What type of informationshould be in an effective management information system? 38
- 39. Total loans andcommitments Newly granted loans, renewals, and restructurings Delinquent and nonaccrual loans Adversely rated credits Loans in excess of credit limits Loans in noncompliance with policy Credit exposure by type, geography, collateral, 39
- 40. Banks should takeinto consideration potential future changes in economic conditions when assessing individual credits and their credit portfolio, and should assess their credit risk exposures under stressful conditions. 40
- 41. Stress Testing ◦ Economicor industry changes ◦ Market-risk events ◦ Liquidity conditions 41 What if?
- 43. Banks should establisha system of independent, ongoing credit review and the results of such reviews should be communicated directly to the board of directors and senior management. 43
- 44. Should provide information toevaluate the performance of account officers and the condition of the credit portfolio. 44
- 45. Internal Credit Reviews: ◦Evaluate overall credit administration process ◦ Determine accuracy of risk ratings ◦ Judge whether account officer is properly monitoring credits 45
- 46. Maintain thebank’s credit risk exposure within parameters set by the board of directors Ensure management attention for credits exceeding predetermined levels Perform internal audits on a periodic basis 46
- 47.