Introduction to Credit Risk Mitigation

Introduction to Credit Risk Mitigation

Belinda Green

30 years: Credit risk specialist

Credit risk is the risk of financial loss to a lender should a customer or counterparty default. The accurate measure of credit risk is an essential tool for credit decision making and internal risk management. In the first part of this video series, Belinda will discuss the concept of credit risk - what it is, how it is measure?

Credit risk is the risk of financial loss to a lender should a customer or counterparty default. The accurate measure of credit risk is an essential tool for credit decision making and internal risk management. In the first part of this video series, Belinda will discuss the concept of credit risk - what it is, how it is measure?

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Introduction to Credit Risk Mitigation

15 mins 12 secs

Overview

Credit risk is the risk of financial loss to a lender should a customer or counterparty default. It is managed through a variety of risk management techniques, including documentary mitigants and periodic reviews. The accurate measure of credit risk is an essential tool for credit decision making and internal risk management.

Key learning objectives:

  • What is credit risk?

  • Understand how credit growth facilitates economic growth

  • What are the types of credit risk?

  • How is credit risk measured?

  • Understand how we can mitigate and manage credit risk

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Summary

How does credit growth facilitate economic growth?

When access to credit increases, consumers and businesses (and countries) can borrow, spend and invest more. This increased consumption and investment generates more income and boosts wealth. This then leads to an ever-increasing level of credit, which leads to more spending, investment and value creation.

What is credit risk?

Credit risk is the risk that a customer or counterparty will fail to meet its agreed contractual obligations and potentially cause the lender to incur a financial loss.

What are the two types of credit risk?

  • Direct (on balance sheet)
  • Contingent (off-balance sheet)

How is credit risk measured?

The most common approach to measuring credit risk is the Probability of Default approach, where expected credit loss is measured by assessing three key factors:

  • The Probability of Default (PD) - Measures the likelihood that the customer or counterparty will default on their agreed contractual obligations within a prescribed time period.
  • The Loss Given Default (LGD) - It measures the percentage of the bank’s exposure that is at risk, should the customer or counterparty default.
  • The exposure at Default (EAD) - It represents the total amount owed by the customer or counterparty at the time of default, net of any recovery amount.

What are the drivers of credit risk fluctuations?

  • Changes to macroeconomic environment
  • Changes in industry fundamentals
  • Changes to company’s business model
  • A deterioration in the quality and value of assets pledged as collateral

Highlight some forms of credit mitigation

  • Hedging the exposure with credit default swaps
  • Buying credit insurance
  • Selling the debt in the secondary markets

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Belinda Green

Belinda Green

Belinda Green is a credit risk specialist, with a career spanning 4 continents and numerous sectors. She has spent over 20 years in commercial and corporate lending roles for FirstRand Bank and UBS, where she was director of Corporate Lending from 2002 until 2013. Belinda shifted into education in 2014 and was a Faculty Lead and Senior Trainer for Moody’s Analytics Learning Solutions in Dubai for over 5 years, leading and delivering training programmes across the Middle East and Africa. In 2019, Belinda launched her own training consultancy in London, delivering learning solutions to clients around the world.

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