Credit portfolio risk management A.N. K. Mizan. Risks faced by the banks Credit Risk Interest Rate Risk Liquidity Risk Price Risk Foreign Exchange Risk.

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Presentation transcript:

Credit portfolio risk management A.N. K. Mizan

Risks faced by the banks Credit Risk Interest Rate Risk Liquidity Risk Price Risk Foreign Exchange Risk Transaction Risk Compliance Risk Strategic Risk Reputation Risk

What a portfolio manager has to understand Credit Culture and Risk Profile A banks credit culture is the sum of its credit values, beliefs, and behaviors. It is what is done and how it is accomplished. The credit culture exerts a strong influence on a banks lending and credit risk management. Values and behaviors that are rewarded become the standards and will take precedence over written policies and procedures.

Loan Portfolio Objectives To grant loans on a sound and collectible basis. To invest the banks funds profitably for the benefit of shareholders and the protection of depositors. To serve the legitimate credit needs of their communities.

Strategic planning for a loan portfolio What proportion of the balance sheet the loan portfolio should comprise. Goals for loan quality. Goals for portfolio diversification. How much the portfolio should contribute to the banks financial objectives. Loan product mix.

Continued Loan growth targets by product, market, and portfolio segment. Product specialization. What the banks geographic markets should be. Targeted industries. Targeted market share. Community needs and service. General financial objectives (e.g., increase fee income

There should be Financial Goals Risk Tolerance Portfolio Risk and Reward

Portfolio management Oversight Risk Identification Identifying Concentrations of Risk Evaluating and Managing Concentrations of Risk

Concentration Management Techniques Stress Testing Loan Portfolio Management Supervision – Asset Quality Reviews – Targeted Reviews – Process Reviews – Administrative and Documentation Reviews – Compliance Reviews – Follow-up Evaluations on Management Commitments – Ongoing Supervision

Portfolio Credit Risk Management Processes Assessment of the Credit Culture Portfolio Objectives and Risk Tolerance Limits Management Information Systems