...Rising Student Loan Default Rate: The Next Financial Crisis in the United States Rebecca Richards QBT1 - Language and Communication: Research October 1, 2012 Rising Student Loan Default Rate: The Next Financial Crisis in the United States Introduction Higher education is an important resource for career focused people here in the United States. In order to attend college, most students have to take out loans in order to cover the cost of attending. However, the rising rate of student loan defaults has recently become a serious issue that needs to be addressed. Economists agree that the rising amount of student loan default can prove to be a good indicator when seeking to predict future payments on student loans (Ismail, Serguieva, & Singh, 2011). Recent studies have shown that the growing rate of student loan default on higher education loans could cause another financial crisis in the United States because the loans are government backed, the cost of higher education is on the rise, and unemployment rates are on the rise preventing repayment. Taking on student loans can feel like and endless cycle of entrapment to the borrowers and they are often left with the belief that they have no other choice than to default on their loans. It is impossible to say with 100% certainty where the culpability lies for this unfolding crisis. One point of view is that the students may be at fault for not fully understanding the magnitude of the debt they are taking on...
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...of banker & customer take the form of creditor and debtor. Standard Bank offers different types of loans and advances, which are mainly, categorized under 2 heads, namely Small Enterprise Loan & Consumer Financing. The various types of loans that fall under the category of Small Enterprise Loan are: Easy Commercial Loan, Retailers Loan, Transport Loan, Commercial House Building Loan, Possession Right Loan, Contractor’s Loan, Letter of Guarantee, Working Capital Loan, Letter of Credit, Loan against Imported Merchandise, Loan against Trust Receipt, Builders’ Loan, & Project Loan. And the loans under Consumer Financing are: Easy Loan, Consumer Durable Loan, Parua Loan, Thikana Loan, Flexi Loan, Peshajeebi Loan. This report highlights the loan policies of Standard Bank Limited; explain different issues regarding the disbursement of loans such as: sector where loans are provided, purposes of the loan, eligibility to get loans, documents required, interest charged on loans, & also the rate of penal interest in case of late repayment. From my observation, some weaknesses of the loan policies of Standard Bank Limited are detected, such as high interest rate, charging of loan processing fee, penal interest, maximum size of the loan is small, maximum term of the loan is low etc. And finally, few changes are recommended in the policy to remove the pitfalls & to improve the overall loan policies. 1.1...
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...AlbertCan Drilling Supply Company (ADSC) This company has done well for the past years and based on forecasts, it is looking at a very bright future in terms of growth and sales. The approach of owner-manager Mr. McDonald has been focused on word-of-mouth advertisement and high responsiveness within the local oil drilling industry in Alberta. Given the fact that most of its customers place their orders on an urgent need basis, ADSC has chosen to hold high levels of inventory to address the customers orders with a high degree of responsiveness. However this key selling point of the business model of ADSC has become a serious financial hindrance, causing liquidity problems now that they face growth levels of 25% in sales. ADSC is therefore forces to looking at options to touch up its finances. Liquidity A growing business does not necessarily mean a profitable business. Even though Mr. McDonald has taken great comfort in the growth forecasts and the firm’s capacity, the profits the firm generates are not able to sustain the growth of the company. The fact that ADSC committed to increase its inventory along with its growth anticipations and an extended collection period for their customers, are the root causes of ADSC’s liquidity problem. Inventory – According to Mr. Mcdonald, holding a large amount of inventory is an intrinsic part of the strategy and is a key selling point. It’s important to highlight that not only is the inventory growing at a high pace, inventory holding...
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...Chapter 11: 4, 7, 8, 10, 11, 12, 14, 15, 18, 20, 21, 22, 23, 24, 26, 27 Chapter Eleven Credit Risk: Individual Loan Risk Chapter Outline Introduction Credit Quality Problems Types of Loans • Commercial and Industrial Loans • Real Estate Loans • Individual (Consumer) Loans • Other Loans Calculating the Return on a Loan • The Contractually Promised Return on a Loan • The Expected Return on a Loan Retail versus Wholesale Credit Decisions • Retail • Wholesale Measurement of Credit Risk Default Risk Models • Qualitative Models • Quantitative Models Summary Appendix 11A: Credit Analysis (www.mhhe.com/saunders7e) Appendix 11B: Black-Scholes Option Pricing Model (www.mhhe.com/saunders7e) Solutions for End-of-Chapter Questions and Problems 1. Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of credit risk assessment more difficult for both FI managers and regulators? Credit risk management is important for FI managers because it determines several features of a loan: interest rate, maturity, collateral and other covenants. Riskier projects require more analysis before loans are approved. If credit risk analysis is inadequate, default rates could be higher and push a bank into insolvency, especially if the markets are competitive and the margins are low. Credit risk management has become more complicated...
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...1) KENYA Kenyan borrowers promptly repay their loans despite the stiff interest rates and high inflation, presenting a lower default risk investment environment for banks compared to other parts of the world. The low default risk for banks has however not translated to lower interest rates for customers despite the credit referencing system taking effect. The credit risk is measured in terms of gross non-performing advances as a percentage of the total gross advances. A survey by audit firm RSM Ashvir, based on banks 2012 financial reports showed only 4.6 per cent of loans by banks in 2011 ended up as non-performing advances. The banking industry disbursed Sh1, 335 billion, out of which only Sh61.4 million was defaulted. The risk has consistently decreased from 7.9 per cent in 2009 to 6.3 per cent in 2010. With the increase in interest rates and inflation rate, non-performing advances were expected to go higher, but it is not the case. This shows that the risk in the Kenyan market is low Interest rates spiked in December 2011 after the Central bank increased its key lending rate to a high of 18 per cent to curb the inflation rate which had peaked at 19.72 per cent in November that year. Though both the Central Bank Rate and inflation rate have dropped to 9.5 per cent and 4.11 per cent, banks are still lending at an average of 17.84 per cent. Microfinance institutions in Kenya have suffered significant loan repayment default resulting into subsequently decreased employment...
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...document outlines the underlying research, model characteristics, data, and validation results for Mortgage Portfolio Analyzer, which is an analytic tool to assess credit risk measures, capital levels and stress scenarios for portfolios of residential mortgages. Mortgage Portfolio Analyzer comprises loan-level econometric models for default, prepayment, and severity. These models are integrated through common dependence on local macro-economic factors, which can be either simulated at national, state, and Metropolitan Statistical Area (MSA) levels or input in the form of stress scenarios. This integration produces correlation in behaviors of loans across the portfolio. The simulation incorporates a multi-step Monte Carlo approach and generates monthly P&I cash flows and losses which enables the model to be used for ALM applications or to be combined with an external cash flow waterfall tool and used for simulation of RMBS transactions. Scenario and stress testing is also done in a multiperiod framework. Furthermore, the model accommodates both loan-level and portfolio-level mortgage insurance. The resulting tool can be used for analyzing the credit risk in both portfolios of whole loans and RMBS transactions. © 2011 Moody’s Research Labs. All rights reserved. Many past and present members of the current research group made significant contributions to the building and implementation of the models underpinning the Mortgage Portfolio Analyzer. Xufeng (Norah) Qian and Weijian Liang...
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...the following :- Risks of Interest Rates:- The risk factor that's the most widespread is interest rate for the commercial banks, but commercial banks are proficient at reducing the risk of interest rates by hedging their loans against any kind of variations in the curve of interest rates in economy. To clarify the image more better to give a simple example on this, assume that one bank is making a business loans and the borrower is charged by 5%, keep in mind the current interest rate level is at 2%, so 3% is the amount of profit that the bank can achieve just in case that the interest rate level remains the same at 2% during the life-time of the loan, yet if the general interest rate level has increased up to 3% then the profit will be reduced to 2%. Although the interest rates are outside the field of commercial bank's processes, but they are required to avoid it , because it applies a risks upon the commercial banks. Risks of Default:- Generally Commercial banks are depending on loans in making money. Default borrower can be defined as people who are taking loans from the bank but they doesn't have the ability to pay the premiums of the loan, so to avoid such an issue the bank goes for analyzing their financial position and their ability to pay, and in case that there is a default this will showed in the margin of default in the portfolio of the bank's loan . When borrower is unable to pay this will make default on loan, and this will cause money losses for the...
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...definition of loan, definition of SME, general principles of lending, loan monitoring and control, access to credit as well as repayment performance: theory and practice. 2.1 Definition of loan A loan is a type of debt like all debt instruments, a loan entrails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender which they pay back, using but not always in regular installment. Types of loans There are many different types of loans you can take out. When you are looking to borrow money, it’s important that you know your options. i. Open-ended loans: they are loans that you can borrow over and over again. Credit cards and lines of credit are the most common types of open-ended loans. With both of these loans, you have a credit limit that you can purchase against. Each time you make a purchase, your available credit decreases. As you make payments, your available increases allowing you to use the same credit over and over. ii. Closed-ended loans: this cannot be borrowed once they have been repaid. As you make payments on closed-ended loans, the balance of the loan goes down. However, you do not have any available credit you can use on closed-ended loans. Instead, if you need to borrow more money, you would have to apply for another loan. Common types of closed-ended loans include mortgage loans, auto loans and students’ loans. iii. Secured loans: These are loans that rely on...
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...late has become very scarce for smallholder farmers owing to a number of reasons. Credit institutions argue that smallholder farmers involve only themselves and are never willing to work collectively which limits the success of their business to where their skills and knowledge end. The nature of agribusiness itself leaves a lot to be desired as far as agricultural credit is concerned. Most agribusinesses have slow response to price changes, long-term production cycles, seasonality of production and are further susceptible to climate changes which culminate in cash flow problems and low long-term profitability hence posing high risk of default in payment of credit. On another note, though there are numerous credit institutions in Swaziland, loan processing is slow. Business enterprises in the country at times have to wait for months before their loans are approved (Dlamini 2001 in Ngcamphalala 2005). Although, there is an outcry of the scarcity of farm credit for smallholder farmers, other farmers do obtain funding from institutions that offer farm credit either in cash or in kind through the value chain finance instruments. Through some instruments, funds are advanced to farmers to be repaid usually in kind at harvest time yet through some instruments agricultural inputs are advanced to farmers or others in the value chain for repayment at harvest or other time with the cost of credit usually embedded into the price. Still through other instruments sales agreements between farmers...
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...Assessing the risk, return and efficiency of banks’ loans portfolios ∗ Javier Menc´ ıa Bank of Spain June 2008 Preliminary and Incomplete Abstract This paper develops a dynamic model to assess the risk and profitability of loans portfolios. I obtain their risk premia and derive the risk-neutral measure for an exponentially affine stochastic discount factor. I employ mean-variance analysis with a VaR constraint to assess efficiency. Then I compare Spanish institutions in an empirical application, where small institutions seem to be less efficient than large ones on aggregate terms, while commercial and savings banks perform better on their respective traditional markets. Finally, I find increasing discrepancies between riskneutral and actual default probabilities since June 2007 and discuss their possible sources. Keywords: Credit risk, Probability of default, Asset Pricing, Mean-Variance allocation, Stochastic Discount Factor, Value at Risk. JEL: G21, G12, G11, C32, D81, G28. This paper is the sole responsibility of its author. The views represented here do not necessarily reflect those of the Bank of Spain. Thanks are due to Alfredo Mart´ for his valuable suggestions as well as for ın, help with the interest rate database. Of course, the usual caveat applies. Address for correspondence: Alcal´ 48, E-28014 Madrid, Spain, tel: +34 91 338 5414, fax: +34 91 338 6102. a ∗ 1 Introduction Standard capital market theory states that there is a risk-return tradeoff in equilib- ...
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...CREDIT RISK MANAGEMENT BY COMMERCIAL BANKS IN KENYA, A COMPARATIVE STUDY OF KCB AND COOPERATIVE BANK, CHUKA BRANCHES BY AMULYOTO FRANKLIN UNGAYA (BB1/02596/10) A Research Proposal Submitted to the Department of Business Administration in Partial Fulfillment of the Requirement for the Award of the Degree of Bachelor of Commerce (Banking and finance option) of Chuka University CHUKA UNIVERSITY AUGUST, 2013. DECLARATION AND APPROVAL This research proposal is my own original work and has not been presented for a degree in any other university, either in part or a whole. Amulyoto, F. U. Signature……………………………… Date…………………………………… APPROVAL This research has been submitted for examination with the approval of the following university supervisor: MR. NGENO K. W. A. Department of Business Administration Chuka University Signature………………………… Date……………………………… ACKNOWLEDGEMENT The writing of this proposal was made possible through support and encouragement from various persons. I sincerely thank my creator, the Almighty God who has given me grace to carry out my research study. I would also like to thank my supervisor Mr. Ngeno. Through his guidance and correction I was able to come up with this proposal. The gratitude is profound. Special thanks to everyone else who’s input in this work cannot go unmentioned. DEDICATION This research is dedicated to my mother, Mrs. Judith Amulyoto. TABLE OF CONTENTS ...
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...with Chapter 1 of the text book “Managing Credit Risk Under The Basel III Framework, 3rd ed” Website : https://sites.google.com/site/crmbasel E-mail : crmbasel@gmail.com Copyright © 2016 CapitaLogic Limited Copyright © 2016 CapitaLogic Limited Outline 2 Banking activities Introduction Credit risk factors Credit risk measures A simple loan Appendices Deposits 3% - 20% Shareholders’ equity Copyright © 2016 CapitaLogic Limited Term loans, credit cards, mortgages, corporate bonds < 1% 3 Bank Dividend + equity price appreciation Copyright © 2016 CapitaLogic Limited 4 Funding source Credit Credit Loan Private lending placement Bond The idea that a borrower uses other people’s monies in pursuit of his financial needs Spend today but pay tomorrow DEBT A loan transferable among lenders Interest Equity To compensate a lender for supplying temporary funding to a borrower Media focus in developed countries and China Time value of money Default of the borrower Service charge 5 Copyright © 2016 CapitaLogic Limited Time value of money My money in one year CNY 100,000 + CNY 12,000 Copyright © 2016 CapitaLogic Limited 6 Default A borrower fails to pay to the lender the interest and/or principal in full on schedule Debt collection efforts will then be initiated by the lender to recover the whole or part of the principal plus interest...
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...Module name: Accounting in Context Course title: ELEMENT CW2 (LJ) Credit Risk Management Name of Supervisor: Anthony John Bray Student: Dieu Linh Cao. ID number: 12028548. Word count: 4,467 words. Date: 06/03/2013 Executive summary Every day when reading the financial newspapers or news on TV, I notice that the bad debt still has been the big problem of many economics. Bad debt increases which influences to the bank first, and then to the all of the economy. So, I want to do the research about the Credit Risk Management because in my opinion, this is the way to reduce bad debt effectively. In this report, I have researched about 3 models in Credit Risk Management: CreditMetrics, KMV, and Credit Risk Plus. In each model, I explain and analysis the case study from other document sources. Besides, I also compare and contrast the features or the use of them. In addition, critical thinking is applied in this report, when I have found the other idea, from opponent opinion to agreement. Because of the limitation of knowledge and timing, my report still has had many mistakes. Therefore, if I could do this topic again, may be in the dissertation of the master course, I will make it better, with my experience from AIC subject. Table of Contents Executive summary 2 Declaration 4 Content 5 1. CreditMetrics: 7 2. Portfolio Manager of KMV: 11 3. Credit Risk+: 14 Appendix 18 References 20 Declaration I declare that this research report...
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... which is being less than ideal. Subprime lending is a general term that refers to the practice of making loans to borrowers who do not qualify for the best market interest rates because of their deficient credit history. According to the U.S. Department of Treasury guidelines issued in 2001, "Subprime borrowers typically have weakened credit histories that include payment delinquencies, and possibly more severe problems such as charge-offs, judgments, and bankruptcies. They may also display reduced repayment capacity as measured by credit scores, debt-to-income ratios, or other criteria that may encompass borrowers with incomplete credit histories." Subprime lending is also called B-Paper, near-prime, or second chance lending. Subprime lending encompasses a variety of credit instruments, including subprime mortgages, subprime car loans, and subprime credit cards, among others. A subprime loan is offered at a rate higher than A-paper loans due to the increased risk. Subprime lending crisis, which began in the United States has become a financial contagion and has led to a restriction on the availability of credit in world financial markets. Hundreds of thousands of borrowers have been forced to default and several major subprime lenders have filed for bankruptcy. Types of subprime lending Subprime mortgages Subprime mortgage loans are riskier loans in that they are made to borrowers unable to qualify under traditional, more stringent criteria due to a limited...
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...FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman This book is an overview of the Commercial Mortgage-Backed Securities (CMBS) market. The contents of this publication are over eight years in the making and include excerpts of research reports from as early as 1997. In this fifth edition of our primer, we have reorganized the chapters to highlight the different investment options within CMBS. New material since our last edition includes sections on the various types of AAA CMBS classes, total rate of return swaps, floating rate large loan transactions, and an updated version of the commercial mortgage default study. We hope you find this book useful and welcome comments so that we can improve future editions. FIFTH EDITION 2005 Transforming Real Estate Finance A CMBS Primer Primary Analysts: Howard Esaki Marielle Jan de Beur Masumi Goldman The Primary Analyst(s) identified above certify that the views expressed in this report accurately reflect his/her/their personal views about the subject securities/instruments/issuers, and no part of his/her/their compensation was, is or will be directly or indirectly related to the specific views or recommendations contained herein. This report has been prepared in accordance with our conflict management policy. The policy describes our organizational and administrative arrangements for the avoidance, management and disclosure...
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