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Credit Risks |
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It comprises a number of sub-risks:
Default risk – the risk of loss due to counter party, customer, supplier or client default
Credit downgrade – the risk that an issuer’s debt security’s ratings will be lowered because of its deteriorating financial conditions. A ratings agency downgrade may be the result of changes in available capital, in industry perceptions or changes in regulatory agenda.
Collateral risk – This is the risk when the back-office either fails to recognize a counter-party’s failure to post collateral or fails to demand an appropriate level of collateral, given the credit risk.
Settlement risk – Following the failure of a counter party (part of credit risk), this is the risk when settlements have not recognize this failure and possibly continue to make payments. It also denotes the risk of counter party default in the period between delivery and settlement of funds.
Credit risk management has its own well defined discipline and has developed its own rules of good practice, including:
- Expected losses from bad debt should
always be used to determine and
update any necessary loss provisions.
- Contractual risk transfer – several
administrative aspects of the
contract can control or reduce
credit exposures.
- Financial restructuring –
restructuring the financial terms of
the contract can also help mitigate
credit exposures
- Diagnostic control systems – in
particular, systematic and
consistently applied credit scoring
and credit management policies
and procedures can be used to
evaluate new credits and monitor
and respond rapidly to changes in
credit quality
- Boundary systems – periodic
exposure reports describing position
limits on counter parties or industry
sector and also any internal and
external credit risk assessments. Loss
prediction of credit losses – there are
two basic approaches. First, in the
banking sector, credit models of the
value of loan portfolios is based on
historical credit spread volatilities.
- Secondly, in the insurance sector,
actuarial models can be used based
on default frequencies and losses
given within a given credit rating.
- Hedging using derivatives – credit
derivatives are bilateral financial
contracts that isolate specific aspects
of credit risk from an underlying
instrument and transfer that risk
between two parties.
Haselfrë works with the C-level executives of the Companies so as to better understand the strategies and identify the ‘Credit Risks’ and could include:
- Drawing up the strategy maps for the company
- Craft the Sustainable Balanced Scorecard in line with strategy maps
- Identify ‘Credit risks’ that could arise due to the new strategies or introduction of complex new products
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