The Changing Landscape for Credit Risk Management

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Historically credit risk portfolios have been managed within separate lines of business, creating silos of activity separate from market and operational risk. Credit risk models supported the management of loans and workflow – from origination and scoring, to risk grading, price optimization and underwriting. Loss reserves were primarily monitored and managed using internal ratings and factors linked to loan covenants, or otherwise managed through hedging and securitization. This siloed approach, however, can lead to consequences – as we learned during the financial crisis of 2008. In a 2010 report published by the Chartered Institute of Management Accountants (CIMA), it was noted that compartmentalization of credit, market and operational risk within silos “negated the benefits of a structure designed to cascade risk management down through different divisions.”1 This created a blind spot for risks developing across the firm, and it encouraged credit portfolio managers to increase their risk appetite without consideration of the broader, group-level implications, such as correlation risk across geographies. Recognizing that this blind spot resulted in overexposure, supervisory authorities introduced a spate of new regulations and accounting rules. The greatest impact has been on capital and liquidity, with increasing costs and pressure on margins; these drivers, in turn, have acted as a catalyst for the integration of credit portfolio strategies with other lines of business that affect market, liquidity and operational risk.

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Date: 9 November 2016, 13:38 pm   |   Provider: SAS Institute GmbH   |   Size: 698 KB   |   Language: English
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