1. Risk Management
University of Economics, Kraków, 2012
Tomasz Aleksandrowicz

2. credit risk management
credit risk definition
credit risk management tools & techniques

3. credit risk
• risk of not receiving payment for granted loan or
purchased products/services
• credit status
– delayed payment
– default (90 days+)
• defaulted loan causes losses of principal/interests
and additional costs

4. main credit risks
• counterparty risk (risk of default)
• concentration risk (big exposure risk)
• sovereign/country risk (e.g. FX exchange freeze)

5. CRM tools & techniques
• credit policy
• counterparty rating
• risk based pricing
• credit insurance/credit derivatives (e.g. CDS)
• covenants
• diversification (portfolio of credits)

6. credit policy
• rules of credit/borrowing
• driven by risk appetite
• credit acceptance rules/process
• quality of customer/borrower (credit scoring)
• terms of trade (e.g. 7,14,30 days)
• lenders: interest rate policy
• lenders: security and collaterals
• credit risk department separated form sales

7. credit rating
• estimation of credit worthiness
• ability of debt repayment by potential borrower
• credit rating assigned to:
– private individual
– security (e.g. bond, derivative)
– security issuer (e.g. corporation, government,
municipalities, SPV, NGO)
• provided by credit bureau / rating agency
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8. what the rating is?

9. personal rating

10. credit bureau
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11. credit bureau
• credit bureau / consumer credit reporting agency
(UK)
• target private individuals
• evaluation made on overall credit history and current
assets and liabilities
• data collected from credit institutions (banks, credit
unions, corporations)
• users of rating pays for rating
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12. criteria for private credit score
• debt
• usage of credit lines (i.e. credit cards)
• ability to pay a loan
• saving patterns
• spending patterns
• interest
• other (equality issues)
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13. FICO credit score formula

14. FICO rating scale

15. corporate and sovereign rating

16. rating agency
• assigns credit ratings for issuers of certain types of
debt obligations
• target non-individuals: enterprises, organisations and
governments
• evaluation made on company data (annual/quarterly
reports)
• analysis of company statement using financial
analysis tools and methods
• short term and long term debt rating
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17. rating agencies
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20. rating agencies criticism
• not downgraded companies promptly enough
• too familiar relationship with rated company
management
• payment model – rating is paid by rated institution
• errors of judgment in rating structured products
• oligopoly allegations
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22. risk based pricing

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26. credit insurance/credit derivatives

27. covenants
• monitoring e.g. regular reports and audits
• refrain from paying dividends or other actions
• limit the borrower’s ability to borrow further money
• repayment of the loan if specified events occur
• repayment of the loan when agreed financial ratio
reach particular level

28. diversification (portfolio of credits)