Credit Risk Models in Financial Institutions Essay

Credit Risk Models in Financial Institutions - Essay ExampleThe most critical component part that affects the 3Cs of a affirm is Credit Risk.Banking is a domain where essay-free activity is an unknown concept. Particularly in the field of credit appraisal, risk is associated with every decision made by the portfolio analyst. Although it is not possible to wipe out risk altogether, it can be reduced to a manageable level. Stated simply, zero-risk situation is impossible to be achieved in banking.There have been considerable discussions regarding the role of the portfolio analysts and credit officers in banks. It has been noted that in several cases, officers argon forced to take a decision kinda than making a decision due to the lack of freedom to try and make a decision based on the merits of the case. There are two ways of comer to a decision subjective and nonsubjective. A subjective decision is based on the impression the bank has about the counterparty. Although this metho d has a substantial role to play in the decision making process, an objective analysis instils a certain degree of integrity, security and refinement. Credit Risk Management is an activity of general importance for any bank. Effective risk management increases the stakeholder value by providing for value creation, value preservation and capital optimization. Credit Risk example is the first step towards implementing a robust risk mitigation environment. Credit risk models are mean to aid banks in quantifying, aggregating and managing risk across geographical and product lines (BIS, 1999). The pith of the report ordain bosom various aspects of credit risk modelling such as techniques to measure risk, building an assessment model and the various prevalent credit risk models being used world wide. In the process the report also throws take fire on subjects such as banking risks and credit risk parameters.What is Credit RiskRisk taking is a synonymous with credit appraisal. Risk taking is not an activity that takes place by chance rather it is a deliberate action in the process of financial decision making. Risk is a factor, which, if it takes effect, produces unwanted outcomes for the bank. Bhargava (Bhargava, 2000) presents an insightful pie chart describing the main financial risks that are prevalent in the banking industry.Figure Pie Chart display the pro segment of Financial Risks (Bhargava, 2000)It can be clearly seen that Credit Risks occupy a major portion of the pie and a bane for most bankers across the world.Risk Management Group of the Basel Committee on Banking watchfulness defines credit risk as potential that a borrower or counterparty of a financial institution will fail to meet the obligations in accordance with the agreed terms (bcbs54, 2000). In other words, the probability that the manslayer of the loan will not pay back in full, within the specified time frame, the masterful repayment amount including any interest and service charge is called credit risk. Lack of appropriate change discipline and inadequate system of control generally results in setbacks to banks. Several major banks such as Enron have collapsed due to poor transaction management, incomplete credit information and