Implications Of Credit Risks And Credit Risk Management System

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Implications of Credit Risks Credit risk is referred to as the primary banking system in financial risk management. It exists in virtually all banking activities that are income producing. Therefore, the way the bank manages and selects credit-risks is significant to the long-term performance of the overall banking operations or performance. Researchers note with a lot of concern that many financial and banking institutions have failed because of the capital depletion that is largely attributed to losses in loans. For this reason, the rating in credit risks and identification is the first significant step to manage the banking operations effectively. There is a regulatory requirement by OCC that expects all the national banks in the…show more content…
Indeed, most of the debtors generate their liquidity, income, and revenue from assets. These two banks use both liquidity and capitalization analysis during the advancement of their credit facilities. It helps in the determination of borrower’s ability to persevere through unplanned events and economic slowdown. The other critical aspect that these banks focused on, especially when advancing credit facilities to a business, is the cash flow. In essence, the cash flow is the operating revenue derived as result of company operations or activities. Cash flow helps in determination of working capital. Projection Analysis Bendigo and Common Wealth use projection analysis in the determination of the debtor’s credibility including both the historical and current information. This analysis helps in assessing the borrower’s financial condition and track record. It helps in evaluating the expected performance of the business or the venture that the debtor undertakes. The banks also compare between the financial projections of the borrower and his or her historical performance, which determines whether the projections are achievable. They carry out this analysis through best case, break-even, and downside methods. In most cases, borrowers that experience a negative deviation in their projections fail the credibility test in risk rating (Gestel et al. 16). Referral of Repayment sources Before the Bendigo and Common Wealth banks advance their
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