Credit Risk Essay

587 words - 3 pages

Credit Risk Management: Credit risk can be defined as risk of failure of customer/counterparty of the bank to meet financial obligations. Another major source of credit risk could be concentration risk, which arises when a bank’s credit portfolio tend to be non-diversified i.e. large single borrower exposure or lending exposure to clients having similar economic factors (single sub-sector, industry, geographic region etc.) that would adversely impact the repayment ability of mass obligor during any possible economic downturn. To ensure the portfolio health, the bank has distributed the overall credit concentration among different segments/industry/trading. For example, branches are primarily responsible for sourcing of potential clients and initiate limit (credit) approval process for review of Credit Risk Management Division (CRMD), this division (CRMD) ensure the quality of credit proposal before limit approval, a separate division ...view middle of the document...

g. wrong valuation of collateral, Capital computation under Pillar –II using the foundation documentation error etc)
 Internal Rating Based (FIRB) approach
 Concentration Risk Herfindahl-Hirschman Index ( HHI) index

Foreign Exchange Risk Management: The Foreign Exchange Risk arises from transaction involvement in any other national currency. Providing major foreign exchange related transactions are carried out on behalf of client thus bank has minimal exposure to the captioned risk. It is mentionable that the bank do not involve in any speculative transactions. The treasury division independently conducts the transactions and back o ce is responsible for verifying the deal and passes necessary accounting entries. As advised by Bangladesh Bank on month end all foreign exchange related transactions are revalued at mark-to-market rate. All Nostro accounts are reconciled on daily basis and outstanding entries beyond 30 days are reviewed by management for settlement. It is mentionable that bank management is looking forward to establish treasury mid o cue to actively perform the reconciliation activities. Similar to credit risk, RMU is in the process of implementation of Value-at-Risk (VAR) to assess the foreign exchange risk more e actively.

Asset Liability Management:The Asset Liability Risk is comprises of Balance Sheet Risk and liquidity risk. The Balance Sheet risk refers to risk of change in earning and/or devaluation of asset due to interest rate movement. The liquidity risk can be defined as the risk or chance of failure to meet up any withdrawal/disbursement request by a counterparty/client. ALCO reviews liquidity requirements of the Bank, maturity of assets and liabilities, deposit and lending pricing strategy and the liquidity contingency plan. The Asset Liability Committee also monitors balance sheet risk. The RMU risk assessment tools in regards to ALM risk management are as follow:

 Equity investment risk Value -at-risk (VaR) on equity position
 Liquidity Coverage Ratio (LCR)
 Liquidity Risk
 Net Stable Funding Ratio (NSFR)
 Stress Testing (Duration and Sensitivity Analysis)”
 Interest Rate Risk Assessment of Interest Rate Risk in Banking Book

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