Risk management & lending control (7) Flashcards
Post crisis what are board rooms now doing to improve their risk management?
Using stress testing models/what if scenarios/ scenario planning as a forward looking measure to see what risks the business is exposed to
In order for management to make risk decisions based on data, the information must be what 5 things?
1 - Relevant
2 - Recorded
3 - Timely
4 - Accurate
5 -Acted upon
Does management data provide solutions?
No, but it does indicate that action is required, and allows for assessment of the impact on the business.
Therefore management information allows better-informed decisions
What 8 types of risk occur in banking?
- Credit (borrower doesn’t repay)
- Liquidity (run on a bank)
- Market (asset prices crash CDO’s)
- Operational ( Barclays systems fail)
- Reputational (Barclays does insider trading)
- Environmental (earthquake destroys your security)
- External
- Regulatory (failure to comply with regulation)
What are the different areas of operational risk?
- Process risk (how do we assess if a business is credit worthy)
- People risk (did someone make an error in a model)
- Systems risk (did our systems crash and wipe our data)
What are the 3 core pillars of the Basel Accords?
1 - Capital adequacy (capital buffer)
2 - Supervisory review (info on banks activities are in the public domain)
3 - Market discipline (if a banks has higher losses/defaults from its loans then this should impact their credit rating)
What would a banks credit policy contain?
- Risk appetite for certain sectors
- Pricing across sectors
- Minimum security standards/requirements
- Maximum gearing or leverage
- Prohibited areas for lending (e.g. Iran)
What is credit scoring?
- Used on smaller facilities such overdrafts, loans or credit cards
- A method to determine a borrowers strength, what the rate should be and their credit limits
What are the advantages of credit scoring
- Reduces time and cost (only a few cases will need to be escalated)
- Credit scoring is system driven and therefore objective, so decisions are consistent
- Provides a rich database of detailed info on credit risk, which gave be analysed to identify trends
What are the disadvantages of credit scoring?
- Relies on the customer providing correct info
- The credit score could be overriden, which may mess up your data
- It needs to be constantly update
- Only suitable for smaller loans, i.e. business lending is too complex for the system
What are credit referencing agencies?
Companies like Experian who provide credit checks
Subscribers to ratings agencies can give them data about a customers debts if:
- The customer has fallen behind with payments,
- If the amount owed is not being disputed by the customer and;
- If the borrower hasn’t agreed a solution to repaying the debt following the subscribers (lenders) demands
What is a relationship manager?
All banks assign relationship managers to SME’s onces the business has reached a certain size
What is the lending sanitation of a relationship manager?
The size of loan then can sanction before it needs to be passed to a higher authority
You would have a different limit for secured vs unsecured lending
In terms of credit assessments, what info does the lending code state you require?
- The type and size of the faciltiy
- How the customer has handled their past finances
- Financial accounts and business plans
- Internal credit scoring techniques
- Evidence of the borrowers declared income
- The purpose and tenor of the loan
- Is security provided?
