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R Patrick Sequeira ʹ Roll No. 45

R Jayesh Malwankar ʹ Roll No. 18
R Norbert D͛Souza ʹ Roll No. 10
R Bede Pereira ʹ Roll No. 35
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R |redit risk is the possibility that a borrower or counter-
party will fail to meet it͛s obligations in accordance with
agreed terms

R |redit risk is a commercial risk because it is business

driven i.e. the risk arises from a bank͛s dealings with or
lending activities to a corporate, individual, another bank,
financial institution or a country

R |redit risk benefits from diversification effect of the

portfolio

R |redit risk is invisible in nature and difficult to predict

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R Direct Lending

R Guarantees or Letters of |redit

R Treasury Operations

R Securities Trading Business

R |ross Border Exposure

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R ^|^
á Non-Payment of debt obligation
á Delay in payment of debt obligation
á Bankruptcy

R ^
á Grade risk
á Default risk
á |oncentration risk
á Intrinsic risk




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#!$| |!^  $ ^%^

 !& R Ratings, default and migration probabilities,

recoveries under default
 R Book values of loans, notional and mark-to-market
'# values of derivatives

^! R Losses valued at book value or at mark-to-model

 values for migrations and default

R |orrelation results from common factors

|^ influencing risk drivers and individual credit
standing of borrowers

^ R Loss distribution under default mode only or under

  full valuation of migrations

|^ R Úalue at Risk (ÚaR) from loss distribution

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R Ñs per the Hammurabi |ode ... a defaulter could be seized
by his creditors and sold into slavery

R Ñs per Biblical records ... a defaulter was tortured,

imprisoned or forced into slavery along with his wife and
children

R Modern Bankruptcy Law ... offers protection to a defaulter

from creditors and extinguishes the debt obligation

R Modern Banking practices ... make individuals, corporate

entities and even nations slaves to their own debt

Link to The International video

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R The 1988 Basel Ñccord required internationally active
banks in the G10 countries to define a minimum capital
level in relation to on and off-balance sheet assets
(weighted values)

R Recommended that banks should hold capital equal to at

least 8 per cent of weighted assets

R Requires a 2-step approach whereby banks convert their

off-balance sheet positions into a credit equivalent amount
through a scale of conversion factors, which are then
weighted according to the counter-party͛s risk weighting
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^
( á Paid-up capital

á Disclosed reserves (retained profits, legal reserves ͙)

^
) á 6ndisclosed reserves

á Ñsset revaluation reserves
á General provisions
á Hybrid instruments (must be unsecured, fully paid-up)
á Subordinated debt (max. 50% Tier 1, min. 5 years ʹ
discount factor for shorter maturities)

!
  á Goodwill (from Tier 1)

á Investments in unconsolidated subsidiaries
(from Tier 1 and Tier 2)
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, - |ash
- |laims on OE|D central governments
- |laims on other central governments if they are denominated
& funded in the national currency (to avoid country transfer risk)

), - |laims on OE|D banks and multilateral development banks

- |laims on banks outside OE|D with residual maturity < 1 year
- |laims on public sector entities (PSE) of OE|D countries

-, - Mortgage Loans

(,, - Ñll other claims: claims on corporate, claims on banks outside

OE|D with a maturity > 1 year, fixed assets, all other assets ͙
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, 6ndrawn commitments with an original maturity of max. 1 year

), Short-term self-liquidating trade-related contingencies (e.g. a

documentary credit collateralized by the underlying goods)

-, - Transaction-related contingencies (e.g. performance bonds)

- 6ndrawn commitments with an original maturity > 1 year

(,, - Direct credit substitutes

(e.g. general guarantees of indebtedness ͙)
- Sale and repurchase agreements
- Forward purchased assets
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0^$^+ Simplicity of calculation

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R The absence of differentiation between the different risks of

private corporations

R Short facilities have zero weights while long facilities have a full
capital load ... this unequal treatment creates arbitrage
opportunities to reduce the capital load

R No allowance made for recoveries (if default occurs)

R Does not capture diversification effects

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R |redit risk is the most important risk to which a bank is exposed

R |redit risk management is critical since the default of a small number of

important or high net-worth customers can generate large losses,
potentially leading to insolvency

R Banking institutions have always monitored credit risk actively through a

number of systems such as limits, delegations, covenants, internal ratings
and watch lists

R In an era of liberalisation, globalisation and privatization ... the

diversification of the credit portfolio can reduce the size of loss (in the
event of defaults) or can improve the shareholder͛s value

R Ñn effective credit risk management system pushes further away the frontier
between measurable risks and invisible ʹ intangible risks as well as creates a
link between risks and the sources of uncertainty that generate them
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