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CREDIT RISK 

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CREDIT RISK 

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CREDIT RISK 

Financial exposure resulting from a bank’sdependence upon another party to keep it

whole. It is acquired when bank funds are

extended or committed to another party.

Must be recognized and evaluated whenacquired and priced appropriately.

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 IMPACT OF CREDIT 

• Impacts capital through diminished earnings

from increased loan losses

• Increases personnel and legal costs

• Impacts bank’s ability to market new

equity or debt issues

• Increases the level of other risks, liquidity,

legal, and reputational risk 

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 MEASUREMENT NEEDS 

• System to measure

risk at onset and

throughout duration of the loan

• Ability to aggregate

customer’s credit risk 

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CONTROL ELEMENTS 

• Policy

• Credit risk evaluated at the outset of the borrower’s ability to repay

• Credit structured so that the purpose of the

loan will match the source of repayment

• Secondary sources of repayment are

identified

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 BANK LENDING POLICIES 

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 BANK LENDING POLICIES 

• Provides the foundation for sound loan

 portfolio management

• Basic objectives:

 – Made on a sound and collectible basis

 – Profitable for shareholders and provide

 protection for depositors

 – Serve the need of the communty

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 LENDING POLICY 

• Should contain general outline of scope and

allocation of credit

• Broad and not overly restrictive

• Flexible rules

• Provide for presentation of loans staff 

 believes are worthy of consideration which

may or may not be in scope of the policy

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 DEVELOPING THE LENDING

 POLICY 

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 DEVELOPING THE LENDING

 POLICY 

• Bank’s financial resources

• Personnel• Facilities

• Future growth potential

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COMPONENTS OF A LENDING

 POLICY 

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COMPONENTS OF A LENDING

 POLICY 

• Geographic Limits

• Distribution by loan

category

• Types of loans

• Maturities

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COMPONENTS OF A LENDING

 POLICY 

• Loan Pricing

• Loan-to-Value Ratios

• Financial Information

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COMPONENTS OF A LENDING

 POLICY 

• Concentrations

• Loan Authority

• Collections

• Exceptions to the

Policy

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 LOAN PROCESSING

SEQUENCE 

• A written application is made

• A credit file is maintained• Internal risk rating assigned

• Pricing

• Appropriate approval process• Conforms to established policy and

underwriting standards

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 LOAN ADMINISTRATION 

 PROCESS 

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 LOAN ADMINISTRATION 

 PROCESS 

• Policy development, revision and

implementation

• Underwriting standards

• Management Information Systems

• Loan approval process

• Credit file requirements

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 LOAN ADMINISTRATION 

 PROCESS 

• Collateral documentation requirements

• Monitoring reports• Collection guidelines

• Provision for bad loans

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 INTERNAL LOAN REVIEW 

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 INTERNAL LOAN REVIEW 

• Systematic analysis of Portfolio

• Independence• Qualified personnel

• Depth of reviews

• Review and follow-up