Chapter 3 Introduction to credit risk and factors affecting credit risk文档格式.docx
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3.4DEFININGCREDITRISK6
3.6BANKINTERNALFACTORSAFFECTINGCREDITRISK7
3.7EXTERNALFACTORSAFFECTINGCREDITRISK11
3.8SUMMARY52
TESTYOURKNOWLEDGE-THEORY55
ESSAYQUESTIONSANDCASESTUDIES:
CHAPTER3-CREDITRISK&
FACTORSAFFECTINGCREDITRISK57
APPENDIX1–INFORMATIONRETRIEVEDDIRECTLYFROMTHEWEBSITEOFNEWZEALANDRESERVEBANKABOUTTHEBASELCAPITALADEQUACYREQUIREMENT63
AIM
Toprovidelearnerswithaclearunderstandingof:
∙creditandcreditrisk;
∙theprimaryclientclassificationofbanks;
and
∙thefactorsaffectingcreditrisk.
KEYCONCEPTS
CreditCreditrisk
CreditpolicyDefaultrisk
CompetitionbetweenbanksIndividuals
SoleproprietorshipsPartnerships
CompaniesTrusts
MacroexternalvariablesEconomicenvironment
InternationalenvironmentPhysicalenvironment
InstitutionalenvironmentandlegislationTechnologicalenvironment
PoliticalenvironmentSocialenvironment
LEARNINGOUTCOMES
Oncompletionofthischapterlearnersshouldbeableto:
∙Brieflyexplainwhatcreditisandhowbankcreditdiffersfromcreditingeneral.
∙Definecreditrisk.
∙Explaintheinternalfactorsthataffectthecreditriskofbanksandanalysetheactualinformationofbankstoratetheirrelativeriskwithregardtoeachotheraswellasingeneral.
∙Analysetheexistingtrendincompetitionbetweenbanksandprovideinnovativesolutionsastohowbankscouldcompetesuccessfullywithoutincreasingcreditrisk.
∙Explainthedifferentborrowergroupsofbanksandthecreditriskspertainingtoeachofthegroupsthatbanksshouldconsiderduringcreditriskdecisions.
∙Comparetherelativecreditriskofclientsfromdifferentindustries/sectorsandproviderecommendationswithsubstantiatedreasonsformarketexpansioninthedifferentindustries.
∙Considerthedifferentimportantaspectsintheeconomicenvironmenttodeterminewhetherthecreditrisksofbanksareincreasingornotandtoproviderecommendationsaboutthecreditriskassessmentprecautionsthatmayberequired.
∙Evaluatethecreditriskeffectthataninternationaltransactionwhichaclientappliesforcanhaveonthebank.
∙Explainphysicalenvironmentalfactorsthatshouldbeconsideredbybanksandapplyinformationaboutthefactorstoactualriskassessmentprocesses.
∙ExplaintheBaselIIaccordasaregulationofcapitaladequacy,andindicatehowincreasesindifferentassettypeswillaffectit.
∙Explainthedifferenttypesofactionsthatcentralbankscanapplytochangethelendingactivitiesofbanks.
∙Discussthedifferentlegislativeaspectsregardinginsolvency,fullage,matrimonies,organisedlabour,andorganisedbusinessthatshouldbeconsideredandclarifyhowtheinformationwillbeobtained.
∙Assessthecreditriskofclientsbasedonthetechnologicalenvironmentthattheyareoperatinginandproviderecommendationsaboutthecreditriskacceptabilityofalendingtransactioninthisregard.
∙Assessthecreditriskoftransactionsintermsofpoliticalandsocialenvironmentalfactors.
3.1INTRODUCTION
Oneofthemostdifficultthingstodo,istopredicttheoutcomeofafutureeventwithcertainty.Allfinancialandbusinessdecisionsare,however,basedonfutureexpectationsandassuchcanonlybeprovedtoberightorwrongafterwards.Noteverydecisioncanberightasnopersoncanconsistentlymakepredictionswhicharecorrect.Tokeepthemarginoferroraslowaspossible,itisnecessarytoseekmethodstoincreasetheaccuracyofdecisionmaking.Allsuchmethodsrequireathoroughknowledgeoffactorswhichcaninfluencetheoutcomeofafutureeventinordertotakethesefactorsintoconsiderationduringthedecisionmakingprocess.
Inthismoduletheuncertaintywhichsurroundstheoutcomeofeventswillbediscussedwithspecialemphasisoncreditriskandfactorswhichinfluencecreditrisk.
3.2DEFININGCREDIT
ThewordcreditoriginatedfromtheLatinwordcredowhichmeans"
Ibelieve"
andreferstothefactthatapositionoftrustisestablishedwhenapurchaser/borrowerpresentshis/hercreditworthinessasmediumofexchangetoobtaincertaingoodsorservicesimmediatelyagainstdeferredfuturepayment.
Creditcanthusbedefinedas:
!
Thefacilitytoobtaingoodsorservicesimmediatelyagainstapromisedfuturecashpayment.
Theabovementioneddefinitionreferstocreditingeneral.Fromabankingviewpointcreditcanbedefinedas:
Anytransactionenteredintowithapersonorconcernwhichresultsinfundsbeinglent.
PRIMARYACTIVITYOFBANKS
Theoperationalactivitiesofbanksconsistsimplisticallystatedoftakingdepositsandlendingmoney.Itisthelatteractivitythatposestheriskofilliquidityoreveninsolvencytobanksifitisnotexecutedinascientificmanner.Thisstatementisprovenbythefactthattheprovisionforbaddebtsbybanksarenormally,accordingtotheirannualreports,0,75%oftotalassets,whilstthenetprofitbeforetaxationoflargebanksisapproximately2to2,5%.Badvariationsinbaddebtprovisioningwillthereforehaveasubstantialeffectonthenetprofitpercentage.
Wefurtherfindthatbankscanexperienceincreasingpressureonincomemarginsfrominteraliathefollowingcaseswhichcouldbeextensivecontributingfactors:
Firstlycontinuousandsubstantialchangesintheexchangeratesofthecurrenciesofcountriescanaffectdifferentsectorsoftheeconomyintermsoftheircreditrisk.Forexample:
Inthecaseofthecontinuousstrengtheningofacurrency,businessthatareprimarilyintheexportmarket,mayloosemarketshareduetotheirinabilitytocompetewellwithproductprices.Inthecaseoftheweakeningofexchangeratesitmayeffectbusinessesthatareexportingwell,butthissituationmayplaceaheavyburdenonbusinessesinrespectofthereinvestmentoffundsforreplacementofimportedmachineryandequipmentofcapitalassetnature.Itisespeciallythesurvivalofthesmallerbusinesseswhichisthreatenedbythis.Theresultisthattheriskofbanksincreaseswhentheyfinancethesebusinessesorindividualswhoaredependantonthesebusinessesforanincome.
Thephaseoftheeconomiccycleinacountrycanalsohaveasevereimplicationonthecreditriskofbanks.Thisisprovenbythefactthateconomicactivitywithanincreaseininflationandveryhighincreaseingrossmoneysupply,whichnormallyformpartoftheupwardpartoftheeconomiccycle,willresultininterestincreasesintermsofmonetaryauthoritydecisions.Governmentsgenerallyuseinterestratestocontroltheeconomy.Thisisachievedbyloweringinterestratestostimulatetheeconomyandincreasinginterestratestocooltheeconomydown.Theseregulatorymeasurescanseverelyinfluencetheliquidityandsolvencyofbusinessesandindividualswhomakeuseofinterestbearingdebtduringperiodsofincreasinginterestrates.
TheCentralBanksofcountriesalsoplacecertainrestrictionsonbankstocontroltheeconomybyinteraliachangingcashreserveandliquidassetrequirements.Thisgenerallyleadstobankslimitingtheirlendingduringperiodsinwhichhighercashreserveandliquidassetrequirementshavetobeconformedto.Thusthefinancialperformanceofbankscannormallynotbesustainedduringsuchperiods.
Floodsanddroughtsinthenaturalenvironmentcontributetothebaddebtsofbanks.
Thebankingsectorisdependentonexpensiveinformationtechnologyduetotheneedforextensivemanagementinformationandspeedyprocessingoftransactions.Banksthushavetomakelargecapitalinvestmentsinequipment.
Thecompetitionbetweendifferentbanksaswellasthecompetitionwithothertypesofbusiness(forexample,motorvehiclemanufacturersthatalsoprovidefinanceforvehiclesthattheysell)isintenseandhasanegativeinfluenceonthefinancialperformanceofbanksingeneral.
Itisevidentfromtheabovementionedfactorsthatbanksfindthemselvesinavolatileandeverchangingenvironment.Theyshouldthuscontinuallytrytoensurebetterfinancialperformancebyconcentratingontheprimaryactivitythroughwhichtheygeneratetheirprofits,namelycredit.Rememberbankers'
breadandbutterbusinessdependsondealingincredit.
3.4DEFININGCREDITRISK
Fromabankingviewpointcreditriskcanbedefinedas:
Thechancethatapersonorconcerntowhichfundsarelentmayforwhateverreasonfailtohonourthecontractualcommitmentsenteredintowiththelendinginstitutionandthatthelendinginstitutionhasnotmadeadequateprovisionstocontrolthedamageorsecureanalternativemeansofpayment.
3.5OVERVIEWOFFACTORSAFFECTINGCREDITRISK
Thecreditenvironmentofabankcanbedescribedasthesumofallthevariableswhichhavearealorpotentialeffectontheriskwhichbankstakewhengrantingcredittoclients,andconsistofthefollowing:
Theinternalenvironmentwhichisthetotalityofinteractingvariables(factors)withinthebankwhichhavearealorpotentialeffectonthecreditriskofthebankandwhichmaybedirectlyorindirectlyinfluencedbybankmanagement.Themainvariablesinthisenvironmentare:
-creditpolicy;
-staff;
-systemsusedforthemanagement,monitoringandcontrolofadvances;
-products;
-targetmarketchoice.
Theexternalenvironmentwhichisthetotalityofinteractingvariables(factors)