Credit risk management in banking sector Essay Example | Topics and Well Written Essays - 2500 words

Credit risk management in banking sector - Essay Example Credit risk management appears to have improved during the past decades due to greater reliance on market determined prices. Credit risk today is managed through the creation of an in-house risk management unit. In addition, efficient credit risk valuation methods are being employed today by banks. Banks have also resorted into more advanced methods of credit risk management and quantification such as value at risk, stress testing, credit scoring. According to BIS paper No.33, financial markets are subject to various sources of risk: credit, market, liquidity, operational and legal risks. These risks tend to be more pronounced in the developing world than in developed countries due to a lower level of economic, financial and institutional development. Credit risk tends to be more acute as a result of a lack of highly rated counterparties. Market and liquidity risks are higher due to thinly traded markets (IMF BIS Paper No. 33). Operational risks may also be exacerbated because of inadequate human resources or the failure of manual, mechanical or electronic systems to process payments. Finally, legal risk may also be part of the environment (for instance, due to the inability to foreclose on collateral). The next section discusses credit risk and some of its components and how it can be managed. 1.2 Credit Risk According to the International Monetary Fund Business Paper No. 33, credit risk is the risk that a debt issuer will default is known as credit risk; this is typically the most important form of risk for commercial banks (Shapiro, 2003; Buckley, 1996; Muller and Verschoor, 2005; Solt and Wayne, 2001).Solt & Wayne (2001) argues that, in assessing credit risk, an institution needs to consider three issues: default probabilities over the horizon of the obligation, credit exposure (ie how large the obligation is when the default occurs) and the recovery rate (ie what part of the exposure may be recovered through bankruptcy proceedings or some other form of settlement) (Solt and Wayne, 2001). Credit risk is often difficult to assess due to the lack of information on the credit history and financial position of borrowers, inadequate accounting practices and standards that make it difficult to evaluate credit exposures, macroeconomic volatility and deficiencies in the institutional environment (e.g., political instability) (BIS Paper No.33, 2005). Weak enforcement of creditor rights may also contribute to uncertainty regarding recovery rates. Although many of these factors have been improving in recent years, progress in some cases is slow (Mohanty et al., 2006). Moreno (2006) highlights two key issues related to credit risk that are relevant for emerging market economies (EMEs). First, the distinct increase in the share of credit to the household sector that has been observed in a number of countries could lower credit risk if the concentration of bank assets fell, if consumer credit diversifies risk among a larger number of borrowers. Moreno (2006), further states that, credit risk could rise if banks are lending in new market segments. Second, there is significant credit risk associated with the effects of asset price fluctuations on banking books. One concern in this case is the volatility

The wisdom of crowds, the way were working Essay

The wisdom of crowds, the way were working - Essay Example The wisdom of crowds, the way we’re working One of the key aspects that make Coca-Cola a market leader is that it allows the diversity of opinion. James argues that groups are remarkably intelligent based on the fact that each member of the group is given an opportunity to contribute. In its effort to ensure wide range of decisions, Coca-Cola initiated a strong feedback system where shareowners and the consumers can provide their own views regarding the management of the company the board. Additionally, the company has well established operating groups that ensure opinions and information from different people reach the company headquarters. Independence of the groups is another important aspect that ensures wise crowds. This means that there is no single individual who makes decision on behalf of the entire group. For example, Coca-Cola board of governors under the leadership of Muhtar Kent, ensures consultation with other heads of department especially during the launching of new products or when adopting a new technology. In this way, each of members of the team feels as part and parcel of the entire company. Decentralization is an additional aspect that results to wise crowds. For instance, to achieve the company objectives, Coca-Cola has allocated qualified marketers and engineers to oversee its bottling plants located in various countries. Through the collaboration of the various heads of departments, wise decisions are made and adequate information is obtained thus enhancing the profitability of the company.