Credit risk management in banking sector Essay Example | Topics and Well Written Essays - 2500 words

deferred payment risk of exposure management in banking sector - Essay ExampleCredit risk management appears to have improved during the past decades receivable to greater reliance on market determined prices. Credit risk today is managed through the creation of an in-house risk management unit. In addition, expeditious belief risk valuation methods are being employed today by banks. Banks have to a fault resorted into more advanced methods of point of reference risk management and quantification such as value at risk, direction testing, credit scoring.According to BIS paper No.33, pecuniary markets are subject to various sources of risk credit, market, liquidity, operational and reasoned risks. These risks tend to be more pronounced in the developing world than in developed countries due to a humble level of economic, financial and institutional development.Credit risk tends to be more slap-up as a result of a lack of highly rated counterparties. Market and liquidity ris ks are higher(prenominal) due to thinly traded markets (IMF BIS Paper No. 33). Operational risks may besides be exacerbated because of inadequate charitable resources or the failure of manual, mechanical or electronic systems to process payments. Finally, legal risk may also be part of the environment (for instance, due to the inability to foreclose on collateral). The next section discusses credit risk and some of its components and how it can be managed. 1.2 Credit RiskAccording to the International Monetary ancestry Business Paper No. 33, credit risk is the risk that a debt issuer will default is cognize as credit risk this is typically the most important form of risk for commercial banks (Shapiro, 2003 Buckley, 1996 stamp and Verschoor, 2005 Solt and Wayne, 2001).Solt & Wayne (2001) argues that, in assessing credit risk, an institution needs to consider three issues default probabilities over the horizon of the obligation, credit exposure (ie how large the obligation is whe n the default occurs) and the retrieval rate (ie what part of the exposure may be recovered through bankruptcy proceedings or some other form of settlement) (Solt and Wayne, 2001). Credit risk is often difficult to assess due to the lack of information on the credit history and financial position of borrowers, inadequate accounting practices and standards that make it difficult to evaluate credit exposures, macroeconomic volatility and deficiencies in the institutional environment (e.g., political instability) (BIS Paper No.33, 2005). Weak enforcement of creditor rights may also contribute to uncertainty regarding recovery rates. Although many of these factors have been improving in recent years, progress in some bailiwicks is slow (Mohanty et al., 2006). Moreno (2006) highlights cardinal key issues related to credit risk that are relevant for emerging market economies (EMEs). First, the distinct addition in the share of credit to the household sector that has been observed in a number of countries could lower credit risk if the concentration of bank assets fell, if consumer credit diversifies risk among a larger number of borrowers.Moreno (2006), further states that, credit risk could rise if banks are lending in new market segments. Second, there is world-shattering credit risk associated with the effects of asset price fluctuations on banking books. One concern in this case is the volatility