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Thursday, September 26, 2019

A critical study of credit risk management in the first bank of Dissertation

A critical study of credit risk management in the first bank of Nigeria Plc - Dissertation Example Circumstances led to the situation in which the giant loss incurring banks due to subprime crisis have to solely depend on capital flow from Middle East, Chinese and investors from Singapore. Thus major nucleus of these losses has been related to credit risk. Thus the notion of the credit risk management is a grave concern in this world of complex financial milieu and it has become highly essential for the financial institutions to suppress loses arising from credit for sustained long run performance. The obnoxious cases of bank failures, acquisitions, consolidation have steered the focus of management of the financial institutions in restructuring operations, improving asset quality and building loan portfolios with credit risk management as the base structure (Yo & Yusoff, 2009, p.46). Influence of credit risk management on the banks Credit risk management has an overwhelming concern on the financial institutions especially that of a bank. The credit risks in simple language can be defined as the potential which the bank borrower or the counterparty will fail to meet its obligations with various agreed terms. The basic objectives of the credit risk management are directed towards the maximization of the risk adjustment of the bank with the maintenance of the credit risk exposure within the domain of various accepted parameters (which may vary from time to time). The banks basically require managing the credit risk intrinsic in the entire portfolio as well as the risks in the individual credits or the transactions. The banks should be also taking into account the relationships between the credit risk as well as that of the other risks. The effective management of the credit risk can be argued as a crucial component of a comprehensive approach towards risk management and are highly essential to the long-term success of any of the banking organization (Principles for the Management of Credit Risk, 2012, p.1). In the recent decades leading to financial crisis, th e banks have operating in an enhanced competitive market and as an involuntary mechanism being forced in taking more risks for seeking out higher margin actions. Securitization, commercial papers have created the platform where the banks can generate higher margin business by the process of converting the illiquid loans into marketable securities and thus lead to the release of capital for other investment opportunities. Empirical testing reveals that the process of securitization leads to the expansion of credit leading the banks to hold riskier assets (Casu et al, 2010, p.3). From the perspective of the Basel Accord II , securitization exposures the banks have to abide by some norms like that of proper documentation of the objectives, summary of the bank’s policies for securitization and whether there is limitations in the application of sophisticated credit risk management with the securitization method. The credit risk management can be successfully implemented if the ban ks adapt refined techniques for minimizing the risk of the expected losses (Securitization of Credit Exposures: Important Tool of Credit Risk Management under Basel Accord II, 2006, p.598). Technology enhancing the process of credit risk management One of the most important parts in the credit risk management is that of quantifying the risks and it is a very crucial part in the risk management process. From

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