Credit risk is defined as the risk of loss associated with a counterparty's possible failure to meet its obligations; or the risk that the debtor will not repay the debt. Bank A provides housing loans to individual debtors. When providing such credit, the bank has the risk that some or all of the individual debtors will fail to pay the interest or principal of the credit they receive. Credit risk arises from the possibility that the credit provided by the bank, or the bonds purchased, may not be repaid. Credit risk also arises from non-fulfillment of various obligations of other parties to the bank, such as failure to fulfill payment obligations in derivative contracts. For some banks, credit risk is the biggest risk they face. In general, the margin calculated to anticipate credit risk is only a small part of the total credit granted by the bank and therefore losses on credit can destroy the bank's capital in a short time. The Bank uses a number of techniques and policies in managing credit risk to minimize the possibility of occurrence or impact of credit losses (known as credit risk mitigation).
To minimize credit risk, the bank developed a simple rating model.
Loans granted by banks at any time can become problematic, but the chances are small if the bank implements a sound lending policy. The first step is to create a credit rating model as a means of determining the probability of default. In this case the bank performs risk calibration which in turn will allow the bank to set a certain probability for each undesirable event (known as the probability of default/PD). This method allows the bank to ensure that the bank's credit portfolio is not concentrated on poor quality loans that have a high probability of default. Bank A's single factor rating model provides housing loans to debtors. To minimize credit risk, the bank developed a simple rating model. In this case, Bank A classifies the credit based on the percentage of credit given to the debtor to the current property value.
Basel II specifically discusses the rating model as part of the credit risk framework.
The bank then calculates the probability of potential loss from each credit group and adjusts its pricing policy so that there is a balance in the bank's loan portfolio. The bank's expectation in this case is that the potential loss from lending of 50% of the current property value is much smaller than the potential loss from lending of 100% of the property's value. Furthermore, the bank will try to adjust the pricing of loans in order to optimize the return on the risks faced. In its application, the rating model also considers several additional factors. For example, the percentage of the debtor's income used to pay credit interest, the debtor's employment history, and the number of years of credit repayment compared to the age of the debtor. Basel II specifically discusses the rating model as part of the credit risk framework. Banks similarly measure their loan portfolios to provide confidence that loans are not too concentrated in one particular industry or geographic area. This allows banks to diversify their credit portfolios so that the risk of systemic defaults can be reduced. This kind of analysis is known as a cohort analysis and can be used for both corporate and individual loans. Basel II requires banks to estimate the impact of economic turmoil and ensure that their business activities are supported by adequate capital to anticipate the impact of the economic turmoil. Apart from allocating capital at an adequate level, the bank also takes other measures to protect its business activities. One of the techniques used by banks to protect themselves from economic turmoil is to package and sell part of their credit portfolios to investors in the form of securities. This technique is known as securitization.
Securitization allows banks to reduce the potential for high exposure to a certain type of credit which, according to the bank's scenario, shows the highest level of risk or concentration of risk. Securitization allows banks to use the funds generated from the sale of assets and invest them in other assets that are considered to have lower risk. Collateral is defined as assets that are agreed upon by the debtor to obtain credit and can be taken over in the event of a default. Collateral has an important role in the lending policies applied by banks. Collateral can take many forms. The most easily recognized and safest form of collateral is cash, while the most common form is residential property. Bank A gives credit to a debtor to buy a house and, as collateral, the bank is given the right to take ownership of the house if repayment of the loan is not made on schedule. In this example, the house above is collateral for a housing loan provided by the bank. Banks need to ensure that the collateral received can actually be used to mitigate the risk when the debtor defaults. The form of collateral submitted is often specific in accordance with the business activities being financed. If the business activity is generally unprofitable, the debtor's assets will be undervalued. In this case the bank must ensure that the collateral remains of sufficient value in the event of a default. Bank A grants credit to an automobile manufacturer and receives the right to take ownership of the plant and its equipment in the event of a default. Due to a lack of sales, the auto manufacturer went out of business and was unable to repay its credit.
Basel I severely limits the types of collateral that can be recognized.
Bank A takes ownership of the plant and its equipment. However, because the general condition of the car industry is in decline, the equipment has a low resale value. In this case, the value of the collateral is much smaller than the credit accrued so that Bank A suffers a considerable loss. Basel I severely limits the types of collateral that can be recognized. However, the types of collateral recognized in Basel II are more diverse, particularly in the Internal Ratings-Based (IRB) approach to credit risk. Some banks that experience high default rates find that immediate action on a deteriorating credit situation can significantly reduce problems. These banks reduce their credit risk by limiting the level of exposure (known as EAD/Exposure at Default), and ensuring that customers react quickly to changing circumstances. Some credit models pay special attention to the cash flows of companies and individuals reflected in their bank accounts. Efficient management of a credit defaulted can result in a recovery (recovery) that is quite large compared to the initial level of loss. Therefore, some banks have created work units specifically tasked with handling bad debt recovery as part of a high-quality credit risk management process. Loss given default (LGD) is the estimated loss that will be suffered by the bank as a result of the default. The determination of LGD and its management together play a role in the Internal Rating-Based approach to calculating capital based on credit risk. The LGD value in the Advanced IRB approach is directly affected by the bank's estimate of the recoverable amount of a credit defaulted.
How to Check Vehicle Number Plate Owners Online, Easy!
Are you planning to buy an automatic car? Or planning to ride it in the near future? Maybe you already know that the way to drive an automatic car is different from the usual car, which shifts the gears manually. Automatic cars have automatic transmissions, where the automatic car gearshift system is designed to be able to move without having to step on the clutch pedal. Automatic transmission has two types of systems, both of which are also known to be simpler and easier, namely semi-automatic and automatic systems. This is How to Check Jakarta Number Plates, Easy! Even though it's automatic, it doesn't mean that driving an automatic type car is just playing the gas and brakes. You also have to be required to have a good feeling in measuring engine power because automatic cars also have transmissions that you can adjust depending on your needs. You will meet the automatic transmission lever with the code P, R, N, D, D3, 2 and L. If you are a new player in driving an automatic car, you are definitely confused by the letters and numbers that are rarely found. 9 Ways to Get Rid of Stickers on Motorcycles, Smooth Back Again! How to Check Vehicle Number Plate Owners Online, Easy! Complete Car Window Film Price List, Must Know! Well, to help you recognize a dead car gear, Qoala will explain in full about automatic car gear, from how to drive it, the meaning and function of each of the codes above and other information you need to drive an automatic car through this review.
If it's your first time driving an automatic car, you may be a little confused about how to drive it. Especially if you are used to using a manual car, which has a different way of operating the gear from the automatic one. This is because you don't have to adjust the clutch or shift gear because it's done automatically. You just need to stop and go without shifting gears or playing the clutch. But if you are not used to having to be careful, you might get confused between the brake pedal and the pedal or the wrong way to use the automatic car gear. Not infrequently heard of accidents because they are not familiar with how to shift gears automatic cars that are not familiar. Therefore you must know some important things in how to drive an automatic car below. As a beginner you need to be careful so that the lever is always in the correct position. First before starting the engine, the lever position must be in the P position or in the N position. Do not position the lever in reverse or R, these positions are used to reverse. If the lever is in the R position, the car will not start when it is started.