Credit Risk Management Strategies

Study Notes

Definition: The process of mitigating the risk of borrower default or non-payment
Key aspects:
- Credit assessment: evaluating borrower creditworthiness
- Risk rating: assigning a risk score to borrowers
- Risk mitigation: using collateral, covenants, and other strategies to reduce risk
Credit risk management strategies:
- Diversification: spreading loan portfolios across sectors and industries
- Risk-based pricing: charging higher interest rates to riskier borrowers
- Provisioning: setting aside funds to cover potential loan losses

Definition: The process of managing a bank's loan portfolio to maximize returns and minimize risk
Key aspects:
- Loan origination: generating new loans and assessing borrower creditworthiness
- Portfolio monitoring: tracking loan performance and identifying potential issues
- Portfolio optimization: adjusting the loan portfolio to achieve strategic objectives
Loan portfolio management strategies:
- Concentration risk management: limiting exposure to specific sectors or industries
- Loan restructuring: renegotiating loan terms to avoid defaults
- Loan sales: selling non-performing loans to recover value

Definition: Lending secured by collateral, such as property or assets
Key aspects:
- Types of collateral:
  - Real estate (e.g., mortgages)
  - Personal property (e.g., vehicles, equipment)
  - Intangible assets (e.g., intellectual property)
- Secured lending benefits:
  - Reduced credit risk
  - Lower interest rates
  - Increased loan amounts
Secured lending strategies:
- Asset-based lending: lending against specific assets or inventory
- Construction lending: lending for property development projects
- Mezzanine financing: providing subordinated debt to support business growth

Credit risk management is the process of mitigating the risk of borrower default or non-payment.
Credit assessment is a key aspect of credit risk management, involving evaluating borrower creditworthiness.
Risk rating is another key aspect, assigning a risk score to borrowers to determine their creditworthiness.
Risk mitigation strategies are used to reduce risk, including the use of collateral, covenants, and other strategies.
Credit risk management strategies include diversification, which spreads loan portfolios across sectors and industries to minimize risk.
Risk-based pricing involves charging higher interest rates to riskier borrowers.
Provisioning involves setting aside funds to cover potential loan losses.

Loan portfolio management is the process of managing a bank's loan portfolio to maximize returns and minimize risk.
Loan origination is a key aspect of loan portfolio management, involving generating new loans and assessing borrower creditworthiness.
Portfolio monitoring is another key aspect, tracking loan performance and identifying potential issues.
Portfolio optimization involves adjusting the loan portfolio to achieve strategic objectives.
Loan portfolio management strategies include concentration risk management, which limits exposure to specific sectors or industries.
Loan restructuring involves renegotiating loan terms to avoid defaults.
Loan sales involve selling non-performing loans to recover value.

Secured lending is a type of lending that is secured by collateral, such as property or assets.
Types of collateral used in secured lending include real estate, personal property, and intangible assets.
Secured lending offers several benefits, including reduced credit risk, lower interest rates, and increased loan amounts.
Secured lending strategies include asset-based lending, which involves lending against specific assets or inventory.
Construction lending involves lending for property development projects.
Mezzanine financing involves providing subordinated debt to support business growth.