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Credit Risk

In: Business and Management

Submitted By jamaljkb
Words 283
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Credit risk is the current and prospective risk to earnings or capital arising from an obligor’s failure to meet the terms of any contract with the Bank or otherwise to perform as agreed. Credit risk is found in all activities in which success depends on counterparty, issuer, or borrower performance. It arises any time bank funds are extended, committed, invested, or otherwise exposed through actual or implied contractual agreements, whether reflected on or off the balance sheet.

Quantity of Credit Risk Indicators

The quantity of credit risk is derived from the absolute amount of credit exposure and the quality of that exposure. How much credit exposure a bank has is a function of:

• The level of loans and other credit/credit-equivalent exposures relative to total assets and capital and
The extent to which earnings are dependent on loan or other credit/credit-equivalent income sources.

• Banks that have higher loans-to-assets and loans-to-equity ratios and that depend heavily on the revenues from credit activities will have a higher quantity of credit risk.

To determine the quantity of credit risk, the quantitative and qualitative risk indicators should be reviewed. These indictors can be rapid growth, high past-due levels, exceeds historical norms, or changes in trends or changes in portfolio mix.

The following evaluation factors, as appropriate, should be used when assessing the quantity of credit risk. As assessment of low, moderate, or high should reflect the Bank’s standing relative to existing financial risk benchmarks and or historical standards, and should take into consideration relevant trends in risk direction. The rate of change as well as the base level of risk from which change occurs should also be...

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