Credit risk

1.Banking risks and their management 1.1. Definition of credit risk 1.2 Analysis of credit risk 2 Bank risk management 3.Means of protection against risk - Guarantees

1.Banking risks and their management

It is known that in general, any action, activity, generates risk, whether practiced during the present or future. Banking can not disregard the risk factor. Banks giving loans take risks that are caused

by borrower quality, or due to general economic development orfinancial structure of the bank. Variables that generate credit risk may come from: Macroeconomic changes: overall GDP growth and its elementelestructurale, inflation rate ,monetary

policy, etc..; - Changes due to financial and banking regulations, economic, that influence theeffectiveness and safety of banking; - Political and economic conditions existing and future implications for the country's debt service.

1.1 Definition of credit risk

Banking defining risk and risks risk are often considered two quite management, different ways: theoretically and practically.When of financial

most authors rely on the mediation functionarea

risks, especially treated the problem of unexpected losses on bank assets, losses from market risk, credit or liquidity. Other authors are based on losses - potential or actual, caused by totally random and

uncontrollable risks such as fraud, fire or natural disasters. Most practitioners address usually one group or class of risks, often in terms of management techniques and rarely are analyzed and mechanisms of transmission / amplification of risk borne by financial institution. Risk can have a significant impact on the value of the bank or financial institution in question, the impact itself (usually in the form of direct losses incurred) and induced impacts caused by the effects on customers, staff, partners and even the banking authority. Thus, the financial sector, risk should be regarded as a complex of risks, often in dependent, in that they may have common causes or that one can generate production chain and other risks. Therefore, these operations and procedures always generate exposure.

Credit risk is the first of banking risks they encounter a banking institution. Express possibility that borrowers or issuers of securities not to honor their obligations on time. For borrower credit

risk expressed in a more broad, degradation of its financial situation. A variety of reasons related or general economic situation or the borrower's business conditions, among which many are unpredictable and affects its financial situation, can contribute to credit risk. Market instruments distinguish two types of risks: Current risk and The potential risk

Current risk is related to current market value, calculated on the basis of present market parameters. The potential risk is related to the possible future values can take the instrument during its existence, future values are determined by future deviations of the market parameters in relation to their current value. The potential risk is called "add on" to express "supplement to the current value". Total risk is the sum of two risks and it measures the total credit risk of the instrument considered. It is certainly clear that a strategy should include both advanced banking software and banking risk management procedures designed to actually minimize the probability of such risks and potential exposure of the bank. Thus the main objective of these policies is to minimize losses or expenses incurred by the bank and banking central objective is to obtain a higher profit for shareholders. The importance of bank risk management but not limited to minimizing expenses. Permanent concern for minimizing risk

exposure management has positive effects on employee behavior to become more rigorous and thorough in carrying out the work.

1.2 Credit Risk Analysis

Credit risk is the risk that during the course of a transaction, one party suffers a loss related to recovery of debts that it has on other participants. These stakeholders can partner with to the transaction, the risk

intermediary or intermediaries that provide paymentand / or intermediaries to arises where a participant during the course of the

ensure delivery. Credit

transaction, not pay

their obligations, in most

cases failure to honor obligations of a participant in a transaction the result of its entry into the state of insolvency. Loans implies a number of risks including and can include: risk of capital loss or insolvency; asset risk or lack of liquidity; risk of interest rate changes for resources mobilized; risk of capital erosion from inflation; risk capital repatriation in conditions of foreign lending. 2

Among these are two fundamental risks: risk of insolvency risk of immobilization Insolvency risk, default risk on time, failure occurs as a result of the credit agreement by the client. Whether you make the final capital loss ,whether partial recovery requires the courts and legal actionslater ,insolvency intereselebncii prejudice. Immobilization risk or lack of liquidity is for banks, all a question of costs. And for banks, liquidity is the ability to ensure at all times required payments to its creditors. That means banks direct payments to customers, cash, or payments ordered by customers to other banks (or better) to other companies that have accounts at other banks. In developed countries, linking liabilities to banks risk asset portfolio held, it uses the WRA (Risk Weighted Asset) which represents the risk each category of assets and property. Identification and assessment of credit risk is to define its major causes and quantify risk exposure. Credit risk is caused by disturbances in the flow of revenue expected to analyze credit application. For each

debtor such disturbance may cause insolvency.

Factors that generate insolvency

Factors can be grouped into external factors and internal factors, without being able to

distinguish between the two categories in terms of amplitude that generates exposure. Internal factors are almost entirely associated team or with poor leadership; Therefore, businesses), is assessing a factor

the professionalism of

the management

partner itself (heated small

so important in the process of credit risk analysis. Also, have welcomed the debtor-wish to make payments on the loan involved payments received. and requires extensive information. External factors - relative to the client - can be grouped into political, economic and banking. They act on entire groups of customers, and therefore, their identification and sectors is done by specialists of the bank, and using information for internal use. Small banks can buy analysis services of larger It is extremely difficult to measure for new customers

institutions or specialized research institutes, but in this case can not be sold inside information protected by bank secrecy. Political factors are based on a political decision that has significant effects on the debtors repayment capacity. They can take different forms, including, embargo, energetic policy change, change of currency regime or monetary policy, tariffs, etc. Economic factors are often related to crisis - with cyclical or sectorial - affecting the markets in

which the client operates. From this point of view, the most important function of bank management is to control and analysis of loan portfolio quality, as poor credit quality is a leading cause of bankruptcy .It 3

is necessary to have a continuous information about results of bank management analysis of credit quality, so the problems are detected and corrected (if possible) in advance.

2. Bank risk management

Counterparty risk management seeks to limit losses if borrowers impairment situation, avoiding

the weaknesses of debtors to involve difficulties too important for the lender. The first step involves the commitment decision, based on qualitative and quantitative criteria that lead

to the establishment decision to grant authorization for commitment. Most permits and all depend on the particular conditions for improving quality borrowers when analyzing credit files. This analysis can be made by bank staff that, by correspondent banks or credit agencies for references. The second stage, back-tracking management and estimating their risk asset portfolio. It is a quantitative risk management based on statistical consideration of the debtor's circumstances, estimates of exposures and losses when conditions customers and diversified customer portfolio. Counterparty risk is the loss of records if the borrowers inability to meet its obligations. These losses depend on the risk exposures and any guarantees. Exposure is in the form of temporary exposure risk profiles .Guarantees are many ways grouped into two broad categories: real and personal. What are intended to reduce losses for credit risk. Based on business needs and to offer bank and proceed to substantiate the credit decision. Decisionmaking in terms of credit include the following details: 1) economic analysis and financial management of the company sought-credit; 2) analyze credit request; 3) the credit decision; 4) periodic review of loan portfolio quality of bank owned short term. Those steps are done with a background of economic information, financial, managerial, monetary,

from the banking system, national economy and the enterprise. Armed with all the economic analysis and practical application of credit, bank credit committee considered short-term loan application submitted by the company analyzed is allowed to credit.Work within the branch bank credit committee headed by branch manager, and in his absence the deputy appointed by him making the decision on granting loans. After adoption, the credit decision is communicated to the applicant.This together with the banking unit that actually give credit, give the credit agreement. To mitigate credit risk prudential measures required few, some set by each bank and others by the central bank.

2.1 Specific risk provisions

In order to determine and limit its credit risk, banking companies must classify loans and one of the following five categories: Standard Observation Standard Doubtful Loss

Category A: if financial performance is very good and allow payment at maturity andinterest rate. Also prefigures and maintaining the high level view of financial performance. Category B: if financial performance is good, but can not maintain this level in a longer perspective Category C: if financial performance is satisfactory, but an obvious trend of worsening Category D: If financial performance is low and cyclical evidence on short intervals Category E: if there are losses and financial performance shows clear perspectives that can not

be paid any interest or rate. Debt service will be assessed: - Good - in the event that interest rates and are paid at maturity or a maximum delay of 7 days - Poorly - in the event that interest rates and are paid with a delay of up to 30 days - Inappropriately - in the event that interest rates and are paid with a delay of more than 30 days

For credit losses banks are obliged to

build

up reserves.

Amounts are

included as

expenditures

and are reported to the National Bank. Levels depending on loan classification provisions are: CLASIFICARE CREDIT "standard" "n observatie" "substantial" "pierdere" NIVELUL PROVIZIONULUI SPECIFIC 0% 5% 20% 100%

Nivelurile provizionului specific fiecarui tip de credit 5

3.Means of protection against risk - Guarantees

Identify credit risks involved and find to good knowledge solutions to neutralize or mitigate means of these risks .In protection addition against

of customer and financial

analysis, other

risks are and guarantees. The choice of a credit guarantee account shall be taken: the quality and type of counterparty credit facility, so that the risks taken by the bank are covered. Loan guarantee must be no additional security measure, Bank estimating attention should be paid that repayment will be the borrower's current for the

activity. Particular

to situations

where the regulation provides and

establishment of the Bank of provisions for credit risk, because the mix of securities performance of the borrower. In these situations it is recommended to improve

financial and be

safeguards

imposefinancial clauses ncontractul credit Assets as collateral to be easily assessed and their value to relatively stable over time In determining this value will take into account the costs of liquidation.

Lending activity by itself is a risk that is very easy to give money to loan, but there are situations where it is an art to manage to recover them. Credit risk can be defined as the risk of loss or failure record profits due to failure of the customer contractual obligations. Bank risk has two components: - Uncertainty about an event in the future; - Exposure to loss. I can say that the risk describes situations in which external or internal factors act in an unpredictable manner bank on its market value. Credit decision is based on the elements of anticipation of borrower activity (making cash flow forecast and financial indicators),which implies acceptance of risk assessment and

informed consent . Consequently, risk can not be , but only prevented and reduced. In this respect, in addition to prudential rules and limiting the risk of credit issued by Bank, every banking company regulates and manages this risk rules and procedures of risk management. Credit risk includes the risk in actual lending and other transactionsundertaken for bank customers, such as issuing letters of guarantee, opening /confirmation letters of credit, discounting of bills presented to customers ,

investmentsshares and other securities, other facilities to customers. Credit risk is the risk assumed by the bank in case of bankruptcy of one of his clients. A bank that is heavily engaged in a company, both through equity investments or loans and through will face

this risk in its bankruptcy. Because of this risk is the difficult economic situation, poor financial condition of firms, lack of supervision. For the bank is focused on the effects of total or partial loss of capital borrowed depending on use certain measures to the nature of guarantees and the risk: the possibility of their recovery. Banks guarantees, close can also of

manage this

establishment of

supervision

authorized lending limits, the existence of a centralized system risk.