best practices in credit risk management
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Best Practices in Credit Risk Management. Observation:. Banks make bulk of their money from good loans; Banks lose bulk of their money from bad loans!. Conclusion:. Thus making more good loans and less bad loans is the dream of every banker!. Credit Risk. - PowerPoint PPT PresentationTRANSCRIPT
Observation:
• Banks make bulk of their money from good loans; Banks lose bulk of their money from bad loans!
Conclusion:
• Thus making more good loans and less bad loans is the dream of every banker!
Credit Risk Management
Assuring Compliance & Capital AdequacyTop Management
InvolvementRisk Policies
Data Quality
Continuous Monitoring
Model Validation
Stress Testing
Back Testing
Credit Risk
Operational Risk
Market Risk
Ensure Capital AdequacyBetter Align Regulatory Capital with various RiskContinuous Risk Profiling
Evaluate Banks Capital
Adequacy Strategies
Certify Internal Models
Proactive Monitoring of Capital levels & Ensuring Remedial Action
Increased Information DisclosureImproved Transparency of Financial Disclosures to the Market
Minimum Capita
l Require
ments
Supervisory Review Process
Market Disc
ipline
Pillar1 Pillar2 Pillar3
Credit Risk
Standardized Approach
PD, LGD, EAD, Haircuts, Off-Balance sheet Exposure (CCF),
Internal Rating Models, Scorecards, CVaR
Regulatory Reports
RWA Computation
Risk-based Loan Pricing
Global Limits Management
Comprehensive Coverage of all Risk Mitigants
Collaterals
Simple Approach
Comprehensive Approach
Guarantees
Credit Derivative
s
Netting Agreemen
ts
F-IRB A-IRB
Best Practices in Credit Risk Management
Effectiveness-focused (decision support) versus
Efficiency-focused (workflow)
Structured & granular risk data for AIRB Compliance
Robust Collateral & Limits Management
End-to-end, integrated platform versus piecemeal
solutions
Proactive concentration risk management
Risk-based and relationship-based lending
OLAP – based portfolio management
Flexible and scalable technology platform
Collection & Recovery System
Collateral & Limits Management System
Credit Rating System
Credit Processing System
SmartLender
Exposure Management
Concentration Reports
Excess Validation
Event Handler
CRM Engine
Haircut Engine
Collateral Maintenance
Documentation
Valuation Engine
Financial Analysis Risk Rating Engine Risk-based Pricing
Group ExposureProspecting Pre-qualification
Covenants MonitoringFacility Structuring Credit Underwriting
Call Management Document GeneratorQueue Management
Perf Incentives Strategy TemplatesSmartView/Reports
Trade Finance
Treasury
Core Banking
Relationship Mgrs
Credit Admin Officers
Remedial Officers
Credit Risk Managers
Front Office Mid - Office Back Office
End-to-end Integrated Platform
Data Warehouse & RWA Engine
Credit Bureau
Reuters
PD
EAD LGD M
Basel II Risk Component
s
Structured & Granular Risk Data for AIRB Compliance
Collection & Recovery System
Collateral & Limits Management System
Credit Rating System
Credit Processing System
SmartLender
Exposure Management
Concentration Reports
Excess Validation
Event Handler CRM Engine Haircut Engine
Collateral Maintenance Documentation Valuation Engine
Financial Analysis Risk Rating Engine Risk-based Pricing
Group ExposureProspecting Pre-qualification
Covenants MonitoringFacility Structuring Credit Underwriting
Call Management Document GeneratorQueue Management
Perf Incentives Strategy TemplatesSmartView/Reports
Collection & Recovery System
Collateral & Limits Management System
Credit Rating System
Credit Processing System
SmartLender
Event Handler
CRM Engine
Haircut Engine
Collateral Maintenance
Documentation
Valuation Engine
Exposure Managemen
t
Concentration Reports
Excess Validation
Financial Analysis Risk Rating Engine Risk-based Pricing
Group ExposureProspecting Pre-qualification
Covenants MonitoringFacility Structuring Credit Underwriting
Call Management Document GeneratorQueue Management
Perf Incentives Strategy TemplatesSmartView/Reports
Drivers for Collateral Management
Robust Collateral & Limits Management
Basel II Minimum Operational
Requirements
Expanding Range of Acceptable
Collaterals
Dynamic Valuation & Covenants
Monitoring
Concentration Risk Management (Pillar
II)
Limitations of Legacy Systems
Robust Collateral & Limits Management
Basel II BCBS Para 115The use of CRM (Credit Risk Mitigation)
techniques reduces or transfers credit
risk but introduces other risks e.g. legal,
operational, liquidity and market risks
Imperative that banks employ robust
procedures and processes to control
these risks e.g. valuation, roll-off risk &
concentration risk
Robust Collateral & Limits Management
Types of collaterals supported with proper categorizationCash (Same Currency, Different Currency)
Marketable Securities (Bonds, Stocks/Index, Stocks/Non-Index)
Guarantees (Corporate, Government, Standby LC)
Insurance & Protection (Credit Insurance, Credit Default Swap)
Document (FX/Derivatives – Netting Agreement, Letter of
Undertaking)
Properties (Residential/Standard, Residential/Luxury)
Asset Based (Plant & Machinery, Vehicle, Receivables, Post-dated
Cheques)
Commodities (Soft, Metals, Energy)
Robust Collateral & Limits Management
Best Practices in Collateral Management
Quality & Comprehensive Collateral Data
Collateral Mark to Market
Automatic Multi-Limit Collateral Allocation
Automatic Security Covenant Monitoring
Sophisticated Documentation Workflow
Combined View of Limits & Collaterals
Concentration Risk Management
Automated Global Collaboration Tasks
Supports LGD & AIRB Computation
Robust Collateral & Limits Management
Multi–limit Iterative Collateral Allocation
Limits sharing among legal entities
Outer and inner limits
Multiple accounts per limits
Collateral specifically charged to a limit
Collateral sharing among legal entities
Many-to-many linkages between collaterals &
limits
Hierarchical and pari passu charging
Prior charge amount
Collateral value not to exceed limit
OLAP – based Portfolio Management
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