A Research On Risk Management

The world’s financial system was almost brought down in 2008 by the collapse of Lehman Brothers that was a major international investment bank at that time. The government sponsored these banks’ bailouts that were funded by tax money in order to restore the industry. Before the crisis, banks were lending irresponsible mortgages to subprime borrowers who had poor credit histories. These mortgages were purchased by banks and packaged into low-risk securities known as collateralized debt obligations (CDOs). CDOs were divided into tranches by its default risk. The ratings of those risks were determined by rating agencies such as Moody’s and Standard & Poor’s. However, those agencies were paid by banks and created an environment in which agencies were being generous to ratings since banks were their major clients.

When a company reached to a level of having a strong risk management team many advantages are revealed. Company can have

For the small community bank, every action involves an amount of risk. A risk management program, which identifies, analyzes, treats, and monitors risks, is necessary for the bank’s operations. Mitigation strategies are implemented against potential losses or a bank failure. The executive in charge of developing and integrating the program is the Chief Risk Officer (CRO). The risk management program for the community bank addresses ten risks associated with Enterprise Risk Management (ERM) or traditional risk management processes, while attaining risk management goals.

Credit risk consists of three parts: the size of the exposure at the time of default, the probability of default occurring, and the loss if the credit event occurs (Fraser & Simkins, 2010). Undoubtedly, a combination of a clear strategy, a knowledge of analytical tools, an understanding of the risk management instruments, responsible oversight, and the ability to be intuitive is crucial to risk management (Bethel, 2016). Wells Fargo is one of the most successful banks in the United States in managing risk. Successfully, they have navigated through risk by choosing a course of action determined by their risk management process (Perez, 2014).

When charted across the largest financial institutions during the 2008 Financial Crisis, it delivers great results. It would have targeted Fannie Mae, Freddie Mac, Morgan Stanley, Bear Stearns, and Lehman Brothers as the most fragile institutions. Moreover, the model could detect the problems as early as the first quarter of 2005, making it a promising predictive tool. Such a risk-measurement instrument can be useful for firms of all sizes: from medium to large-scale funds, to the largest institutional investment houses.

The National Association of Credit Management (NACM) is an organization that provides business Credit services. “As the advocate for business credit and financial management professionals NACM and its network of Partners take great pride in being the primary learning, knowledge, networking and information resource for commercial creditors nationwide” (NACM, 2015). The parts of The National Association of Credit Management that we will explore include the goals of the organization, its history, the four departments of member benefits, and signs of Fraud. As a non-profit organization the NACM has placed a level of quality for the credit professionals in credit and finance branches of business

During my time with Prudential have served many roles within risk management. Originally a Risk Manager in the Operations & Systems department, over the years I have led many initiatives for the Operational Risk area to provide solutions to ensure greater productivity of our managers, the ability to report and analyze the risks and issues within our firm and resolve critical control gaps in the business lines we supported. Most recently, I served as the architect for the ORM department

At our organization, one of our goals was to fully implement the Ferguson model for analyzing credit risk. The Ferguson model was to be implemented organization-wide in the wake of the 2008 crisis. It is a form of "rationing that does not rely on asymmetric information or an exogenous constraint on the supply of loanable funds" (Ferguson & Peters 1997). Credit rationing is analyzed in terms of "a portfolio effect (such as diversification or a regulatory cost) that is not directly related to the creditworthiness of individual applicants" (Ferguson & Peters 1997). Macro economic conditions are given greater significance, and the bank will often offer "a pooling loan rate to all borrowers, even when differences in those borrowers' credit risk are observable" (Ferguson & Peters 1997).

In the midst of a recession, and rising college tuition, many college graduates are now heading back to their parents home to live until they can afford to live on their own (Uchitelle, 2010). It is not surprising, however, that these parents and adults are also struggling in the recession, fighting to hold onto their jobs, their homes and their families. Thus, many Americans are heading into deep water when it comes to ruining their credit, with the illusive promise that loans and credit cards can lead them to a better life; especially when good credit scores are imperative when attempting to acquire a home mortgage. This leads one to ask what a credit score is, what it does and why it is important to make good choices when it comes to our credit.

Private rating institutions such as Moody’s, S&P and Fitch are institutes specialized in determining credit quality giving an indication of the risk of default and creditworthiness. Rating agencies have been known to favour larger banking institutions anticipating additional opportunities for business in securities rating. This has resulted, on multiple occasions, in asymmetric information to prevail causing an overestimate of creditworthiness leading to adverse selection. This report aims to investigate how investment decisions have been affected by credit quality problems over the last 30 years, by focussing on the actions and involvement of banking institutions during times of crisis.

At the same time, these financial institutions may loosen their credit standards in order to get higher loan market share. As a consequence, their lending decisions were based more on collateral requirements rather than cash-flow analysis. In order to accelerate credit-check procedures for loan approval, many banks transferred the responsibility for loan-risk evaluation from their credit-investigation bureaus to less independent monitoring bureaus reporting directly to the banks’ sales divisions.

In today’s world and age, businesses are what control the economy and businesses also have a tremendous effect on people’s lives. With that being said, every business has its ups and downs. In order to be safe, businesses should limit their risks as much as possible, and one way in which this can be done is through credit insurance. Credit insurance is used by businesses all over the world, and it encompasses both commercial risks as well as political risks. The overall goal of credit insurance for businesses is to protect the accounts receivable by allowing a business to obtain revenue for what it sells.

Credit analysis is the process of examining the creditability, credit history and financial situation of client or potential borrowers. The banks or moneylenders to ensure safety of their money use this process. At the same time, bond portfolio managers or investors to debt issuing companies on the basis of their credit rating and financial situations also define credit analysis as investigation process that performs. Credit rating is an important instrument that used by lenders when performing credit analysis of a bond issuing institution or individual (Johnson, 2010).

Credit is used to buy merchandise now but pay for it at a later period of time. (Kapoor, Dlabay and Hughes pg. 14) A consumer credit report is the structured information about an individual's credit record that a credit-reporting agency converses to those requesting information about the credit history of an individual. It includes information on an individual's experiences with credit, non-credit-related bills, collection agency actions, public records, and considerations about the individual's credit history. Credit reports, along with credit history scores have long been measured as one of the crucial factors in credit assessments and credit pricing conclusions. The three national credit-reporting agencies— Equifax, Experian, and Trans Union—seek to accumulate broad amounts of information on all lending to individuals in the United States. (Avery et al. p297-322.26p.)

Risk management is an activity which integrates recognition of risk, risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. Some traditional risk managements are focused on risks stemming from physical or legal causes (e.g. natural disasters or fires, accidents, death). Financial risk management, on the other hand, focuses on risks that can be managed using traded financial instruments. Objective of risk management is