Credit Administration, Measurement And Monitoring Process-Credit and Risk Managment-Lecture Notes, Study notes of Credit and Risk Management

Download Credit Administration, Measurement And Monitoring Process-Credit and Risk Managment-Lecture Notes and more Study notes Credit and Risk Management in PDF only on Docsity! LECTURE – 06 CREDIT ADMINISTRATION, MEASUREMENT AND MONITORING PROCESS Maintaining an appropriate credit administration, measurement and monitoring process  Principle 8: Banks should have in place a system for the ongoing administration of their various credit risk-bearing portfolios.  Principle 9: Banks must have in place a system for monitoring the condition of individual credits, including determining the adequacy of provisions and reserves.  Principle 10: Banks should develop and utilize internal risk rating systems in managing credit risk. The rating system should be consistent with the nature, size and complexity of a bank's activities.  Principle 11: Banks must have information systems and analytical techniques that enable management to measure the credit risk inherent in all on- and off-balance sheet activities. The management information system should provide adequate information on the composition of the credit portfolio, including identification of any concentrations of risk.  Principle 12: Banks must have in place a system for monitoring the overall composition and quality of the credit portfolio.  Principle 13: Banks should take into consideration potential future changes in economic conditions when assessing individual credits and their credit portfolios, and should assess their credit risk exposures under stressful conditions. Ensuring adequate controls over credit risk  Principle 14: Banks should establish a system of independent, ongoing credit review and the results of such reviews should be communicated directly to the board of directors and senior management.  Principle 15: Banks must ensure that the credit-granting function is being properly managed and that credit exposures are within levels consistent with prudential standards and internal limits. Banks should establish and enforce internal controls and other practices to ensure that exceptions to policies, procedures and limits are reported in a timely manner to the appropriate level of management.  Principle 16: Banks must have a system in place for managing problem credits and various other workout situations. The role of supervisors  Principle 17: Supervisors should require that banks have an effective system in place to identify, measure, monitor and control credit risk as part of an overall approach to risk management. Supervisors should conduct an independent evaluation of banks strategies, policies, practices and procedures related to the granting of credit and the ongoing management of the portfolio. Supervisors should consider setting prudential limits to restrict bank exposures to single borrowers or groups of connected counterparties. Establishing an Appropriate Credit Risk Environment The board of directors should have responsibility for approving and periodically reviewing the credit risk strategy and significant credit risk policies of the bank. The strategy should reflect the bank's tolerance for risk and the level of profitability the bank expects to achieve for incurring various credit risks. As with all other areas of a bank's activities, the board of directors3 has a critical role to play in overseeing the credit-granting and credit risk management functions of the bank. Each bank should develop a credit risk strategy or plan that establishes the objectives guiding the bank's credit-granting activities and adopt the necessary policies and procedures for conducting such activities. The credit risk strategy, as well as significant credit risk policies, should be approved and periodically reviewed by the docsity.com board of directors. The board needs to recognize that the strategy and policies must cover the many activities of the bank in which credit exposure is a significant risk. The strategy should include a statement of the bank's willingness to grant credit based on type (for example, commercial, consumer, and real estate), economic sector, geographical location, currency, maturity and anticipated profitability. This would include the identification of target markets and the overall characteristics that the bank would want to achieve in its credit portfolio (including levels of diversification and concentration tolerances). The credit risk strategy should give recognition to the goals of credit quality, earnings and growth. Every bank, regardless of size, is in business to be profitable and, consequently, must determine the acceptable risk/reward trade-off for its activities, factoring in the cost of capital. A bank's board of directors should approve the bank's strategy for selecting risks and maximizing profits. The board should periodically review the financial results of the bank and, based on these results, determine if changes need to be made to the strategy. The board must also determine that the bank's capital level is adequate for the risks assumed throughout the entire organization. The credit risk strategy of any bank should provide continuity in approach. Therefore, the strategy will need to take into account the cyclical aspects of any economy and the resulting shifts in the composition and quality of the overall credit portfolio. Although the strategy should be periodically assessed and amended, it should be viable in the long-run and through various economic cycles. The credit risk strategy and policies should be effectively communicated throughout the banking organization. All relevant personnel should clearly understand the bank's approach to granting credit and should be held accountable for complying with established policies and procedures. The board should ensure that senior management is fully capable of managing the credit activities conducted by the bank and such activities are done within the risk strategy, policies and tolerances approved by the board. The Board should also regularly (i.e. at least annually), either within the credit risk strategy or within a statement of credit policy, approve the bank's credit granting criteria (including terms and conditions). In addition, it should approve the manner in which the bank will organize its credit-granting functions, including independent review of the credit function and the overall portfolio. While members of the board of directors, particularly outside directors, can be important sources of new business for the bank, once a potential credit is introduced, the bank's established processes should determine how much and at what terms credit is granted. In order to avoid conflicts of interest, it is important that board members not override the credit-granting and monitoring processes of the bank. The board of directors should ensure that the bank's remuneration policies reflect its credit risk strategy. Remuneration policies that reward unacceptable behavior such as generating short-term profits while deviating from credit policies or exceeding established limits, weaken the bank's credit processes. Senior management should have responsibility for implementing the credit risk strategy approved by the board of directors and for developing policies and procedures for identifying, measuring, monitoring and controlling credit risk. Such policies and procedures should address credit risk in all of the bank's activities and at both the individual credit and portfolio levels. Senior management of a bank is responsible for implementing the credit risk strategy approved by the board of directors. This includes ensuring that the bank's credit-granting activities conform to the established strategy, that written procedures are developed and implemented, and that loan approval and review responsibilities are clearly and properly assigned. Senior management must also ensure that there is a periodic independent assessment of the bank's credit-granting functions. A cornerstone of safe and sound banking is the design and implementation of written policies and procedures related to identifying, measuring, monitoring and controlling credit risk. Credit policies establish the framework for lending and guide the credit-granting activities of the bank. Credit policies should address such topics as target markets, portfolio mix, price and non-price terms, the structure of limits, approval authorities, exception reporting, etc. Such policies should be clearly defined, consistent with prudent banking practices and relevant regulatory requirements, and adequate for the nature and complexity of the bank's activities. The policies should be designed and implemented within the context of internal and external factors such as the bank's market position, trade area, staff capabilities and technology. Policies and procedures that are properly developed and implemented enable the bank to: (i) maintain sound credit-granting standards; docsity.com