Case Study On Credit Risk Management

9. How do the primary risks of credit unions differ from banks? From savings institutions (SIs)? From finance companies?

In addition to the above the internal incentive to bank should be reduced by requiring greater capital requirements as well as improving upon the definition of what qualifies to be capital. Further in line with the answer to question 3, risk management systems in financial institutions need to be redefined and strengthened to more comprehensively identify, evaluate, manage and monitor risks.

What are the main risks faced by banks and how does a bank attempt to manage these risks?

J.P. Morgan Private Bank was one of the most successful banking services globally. It offered high-end financial products and services with professional risk management team. In financial crisis, the Private Bank successfully survived with relatively great performance. This paper would exposit the key to their success of risk management by answering six questions.

As a result of the lack of regulatory supervision, the banks applied their freedom to exercise a profit maximization approach by boosting up their credit outflows. They achieved this by lowering loan qualifying standards and offering capital to anyone who applied for one. There were timid regulatory stress tests and regulatory reliance was placed on banks’ internal risks models, without apparent exercise of supervisory discretion, even when the most reckless loans were being made. As a result of lack supervision by these regulators achieved the lack of customer trust in the financial service

Emphasis on understanding on the real problem and problems complained by customers and at the same time the Bank has to protect the interest of the shareholder.

In order to protect a particular commercial bank or credit institution out of bankruptcy and the whole banking system out of systematic collapse due to excessive lending or mismanagement, many central banks around the

Credit risk is defined by JPM as “the risk of loss arising from the default of a customer, client or counterparty (2014 annual report, pg. 110)”. This fairly broad definition encompasses large corporate clients, institutional clients and individual consumers. In addition, JPM identified that the primary drivers of credit risk arise from (1) residential real estate, (2) credit card, (3) auto loans, (4) business banking and (5) student lending businesses.

As banks become more innovative in their statistic techniques and methods, they are encouraged to look at the more risk a sensitive approach that is related (capital reduction) incentives. Third, credit risk means financial institutions are allowed to choose from one of Standardization approach that uses risk weighting standards and external assessment if available, or the Internal Ratings-Based (IRB) approach that uses data from internal risk management systems. A securitization framework should be use for banks to involve in traditional and synthetic securitizations or similar structures. Fourth, market risk details the risk engaged in trading book roles and treatment of counterparty credit risk so as to effectively catch event and standard risk for trade-debt and equity equipment. Fifth, operational risk defined as " the risk of direct or indirect loss comes from the inability or failure of internal processes, people and techniques or from exterior events ”. 14 Banking organizations are offered three methods for determining operational risk capital expenses including the Basic Signal Approach, the Standard Approach, and the Advanced Measurement Approach (AMA).

The RAP examines the management of financial risks using derivative instruments in the selected financial institutions in Uganda. Three key research objectives were examined. These included; an examination of the institutions’ objectives for financial risk management, an

Zimbabwe’s financial sector has over the years been crippled by Non-performing loans. Non-performing loans arise from credit risk or default risk which as defined by Jorion(2003) is the risk of an economic loss from the failure of a counterparty to fulfill its contractual obligations. Its effect is measured by the cost of replacing cash flows if the other party defaults. Credit risk can thus be seen to contribute significantly to the profitability of an organization and hence the need to hedge against such risk. This study aims to assess the effectiveness of credit risk management tools which are being used by Microfinance institutions (MFIs) in Zimbabwe by assessing the effect of credit terms, client appraisal, credit control measures as well as credit collection policies on loan repayment. Microfinance Institutions by their nature are more vulnerable to credit risk owing to a number of reasons such as; that the primary clientele of MFIs consists mostly of those who face barriers in accessing financial products from traditional financial institutions Murdoch (2008), the scope of activities is mainly limited to lending that is a microfinance institution cannot engage into other activities done by the bank such as underwriting of securities and foreign trade operations among others .

Risk management is expansion effectiveness in governing of these banks all things considered techniques tend to expand the corporate governance of a financial institution. In times of volatility and fluctuations in the market, financial institutions need to prove their mettle by withstanding the market variations and achieve sustainability in terms of growth and well as have a stable share value. Thus the need for an efficient risk management framework is paramount in order to factor in internal and external risks.

Components of Credit Risk Management Board & Senior Management oversight Organization Structure Systems and Procedures Credit origination Limit setting Credit Administration Measuring Credit Risk Internal Risk Rating Credit Risk Monitoring & Control Risk Review Delegation of Authority Managing Problem Credits

And the customers’ exit policies are not detailed too, which do not lead to enough exit management for customers. 1.3.1.4 Unsound assessment mechanism, no well-suited accountability system In the past, the setting of performance assessment indicators was heavily equalitarian and didn’t consider risk adjusted revenue, so there was little emphasis on risk control and exit management. In addition, there were many behaviors which violated rules or policies, for instance, splitting one big number into several small pieces to avoid authority authorization, exceeding one’s authority to approve, etc., in the process of credit management, since the accountability system was not fully established. 1.3.2 Haven’t formed active and healthy credit culture The credit culture, which is the convention and method developed in credit policies. Business process and risk control are important parts of banks’ enterprise culture. The insufficiency of credit culture lies in two aspects: weak risk consciousness and misunderstanding in credit conception. 1.3.2.1 Weak risk consciousness Firstly, no established scientific development ideas, and lack notion of balance among risk, revenue and capital. No full consideration on possible loss of potential risk and having not realized business expansion, which are constrained by capital. Focusing on the possible revenue from business growth will lead to

Discuss the various kinds of risks involved in outsourcing of financial services which in your opinion, Standard Chartered Bank needs to take note of?