Managing Credit Risk in Bank Loan Portfolio

2018 ◽  
pp. 10-36
Keyword(s):  
Credit Risk ◽  
Six Sigma ◽  
Efficient Frontier ◽  
Sharpe Ratio ◽  
Bank Loan ◽  
Credit Risk Management ◽  
Loan Portfolio ◽  
Maximal Profit ◽  
Investment Grade ◽  
Loan Losses

In this chapter, the Six Sigma DMAIC approach is applied to improve credit risk management in banking loan portfolio selection. The objective is to select the optimal loan portfolio which achieves the bank's investment objectives with an acceptable credit risk according to their predefined limits. Stochastic optimisation constructs an efficient frontier of optimal loan portfolios in banking with maximal profit and minimising loan losses, i.e. credit risk. Simulation stochastically calculates and measures mean gross profit, loan losses, variance, standard deviation and the Sharpe ratio. The Six Sigma capability metrics determines if the loan portfolio complies with the bank's limits regarding the gross profit; loan losses, which quantifies the credit risk; and Sharpe ratio, i.e. a risk adjusted measure. Also, the bank regulation limits are applied based on the bank's capital to control the maximum loan amount per loan investment grade. Analysis allows for selection of the best Efficient Frontier loan portfolio with the maximum Sharpe ratio.

Petroleum Exploration Risk in Prospect Portfolio Selection

2017 ◽  
pp. 40-65
Keyword(s):  
Standard Deviation ◽  
Portfolio Selection ◽  
Six Sigma ◽  
Efficient Frontier ◽  
Sharpe Ratio ◽  
Petroleum Exploration ◽  
Management Approach ◽  
Portfolio Optimisation ◽  
Exploration Risk ◽  
Return Variance

Presented method is applied to petroleum exploration for prospect portfolio selection to achieve investment objectives controlling risk. DMAIC framework applies stochastic techniques to risk management. Optimisation resolves Efficient Frontier of portfolios for desired range of expected return with initially defined increment. Simulation measures Efficient Frontier portfolios calculating mean return, variance, standard deviation, Sharpe Ratio, and Six Sigma metrics versus pre-specified target limits. Analysis considers mean return, Six Sigma metrics and Sharpe Ratio and selects the portfolio with maximal Sharpe Ratio as initially the best portfolio. Optimisation resolves Efficient Frontier in a narrow interval with smaller increments. Simulation measures Efficient Frontier performance including mean return, variance, standard deviation, Sharpe Ratio, and Six Sigma metrics versus pre-specified target. Analysis identifies the maximal Sharpe Ratio portfolio, i.e. the best portfolio for implementation. Selected prospects in the portfolio are individual projects. So, Project Management approach is used for control.

Intelligent System for Credit Risk Management in Financial Institutions

2019 ◽  
Vol 9 (2) ◽  
pp. 57-67
Author(s):  
Philip Sarfo-Manu ◽  
Gifty Siaw ◽  
Peter Appiahene
Keyword(s):  
Credit Risk ◽  
Financial Institutions ◽  
Intelligent System ◽  
Subjective Assessment ◽  
Bank Loan ◽  
Credit Risk Management ◽  
Tree Model ◽  
Assessment And Evaluation ◽  
Employment Sector ◽  
The Government

Credit crunch is an alarming challenge facing financial institutions in Ghana due to their inability to manage credit risk. Failure to manage credit risk may lead to customers defaulting and institutions becoming bankrupt, making it a major concern for financial institutions and the government. The assessment and evaluation of loan applications based on a loan officer's subjective assessment and human judgment is inefficient, inconsistent, non-uniform, and time consuming. Therefore, a knowledge discovery tool is required to help in decision making regarding the approval of loan application. The aim of this project is to develop an intelligent system based on a decision tree model to manage credit risk. Data was obtained from the bank loan histories. The data is comprised of four hundred observations with seven variables: client age, amount requested, dependents, collateral value, employment sector, employment type, and results. The results of study suggest that the proposed system can be used to predict client eligibility for loans with an accuracy rate of 70%.

scholarly journals An Assessment of the Impact of Credit Risk Management and Performance on Loan Portfolio at International Bank Liberia

2021 ◽  
pp. 55-64
Author(s):  
Alvin Boye Dolo
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
The Body ◽  
Management Policy ◽  
Credit Risk Management ◽  
Loan Portfolio ◽  
Net Worth ◽  
International Bank ◽  
And Performance ◽  
The Impact

This research entitled “An Assessment of the impact of credit risk management and performance on loan portfolio at International Bank Liberia Limited from 2015-2017 contributed to the body of knowledge to the beneficiaries. It findings are also important for the Central Bank to use in monitoring credit scoring and history across all commercial bank with in the country. This study was quantitative in nature, and involves mathematical modelling in order to determine the effect of changes in interest rates on profit and net worth of the sampled banks. This study uses panel data and assumes that the effect of interest rate changes vary across the observations and over time, therefore the use of stochastic econometric (panel regression analysis) process is appropriate. The population of the study will consist of 150 credit staffs and other staffs of IBLL. The study adopt a census study and collect data for two years from 1st January, 2015 to 31st December, 2017 and the researcher used sample out 85 respondents representing 57% as the sample size from the population of 150 persons from the study area. The findings reveals that it was established from the study that 25% of the respondents who were picked from the institution agreed that credit score is one of the major system used by the bank in determining loan and 32% selected credit history. It was also observed that that bank operate within a defined credit granting criteria. The findings also show that IBLL established a system of independent, ongoing assessment of the bank‟s credit risk management. It was proven that 48% of the respondents agree while 41% strongly agree. It was established that IBLL have a loan risk management policy in place. This policy is very crucial in providing guidelines on how to manage the various risks the bank encounter in their lending activities. Members of the bank and regulators are those responsible for the formulation of the credit policy with less input from employees.

Research and Development Risk in Projects Selection

2017 ◽  
pp. 66-91
Keyword(s):  
Standard Deviation ◽  
Six Sigma ◽  
Efficient Frontier ◽  
Sharpe Ratio ◽  
Management Approach ◽  
Portfolio Optimisation ◽  
Expected Return ◽  
Return Variance ◽  
Stochastic Techniques ◽  
Development Risk

Elaborated method is applied to R&D for project portfolio selection to achieve investment objectives controlling risk. DMAIC framework applies stochastic techniques to risk management. Optimisation resolves Efficient Frontier of portfolios for desired range of expected return with initially defined increment. Simulation measures Efficient Frontier portfolios calculating mean return, variance, standard deviation, Sharpe Ratio, and Six Sigma metrics versus pre-specified target limits. Analysis considers mean return, Six Sigma metrics and Sharpe Ratio and selects the portfolio with maximal Sharpe Ratio as initially the best portfolio. Optimisation resolves Efficient Frontier in a narrow interval with smaller increments. Simulation measures Efficient Frontier performance including mean return, variance, standard deviation, Sharpe Ratio, and Six Sigma metrics versus pre-specified target. Analysis identifies the maximal Sharpe Ratio portfolio, i.e. the best portfolio for implementation. Selected projects in the portfolio are individual projects. So, Project Management approach is used for control.

scholarly journals Credit Risk Management and Sub-Standard Loans of Commercial Banks in Nigeria: A Panel Data Analysis

2021 ◽  
Vol 2 (3) ◽  
pp. 169-190
Author(s):  
Anele Andrew Nwosi ◽  
Akani Elfreda Nwakaego
Keyword(s):  
Risk Management ◽  
Panel Data ◽  
Credit Risk ◽  
Commercial Banks ◽  
Fixed Effects ◽  
Bank Risk ◽  
Credit Risk Management ◽  
Loan Portfolio ◽  
Risk Diversification ◽  
Risk Transfer

This study examined the effect of credit risk management on sub-standard loan portfolio of quoted commercial banks in Nigeria. Cross sectional data was sourced from financial statement of commercial banks and Central Bank of Nigeria Statistical bulletin from 2009-2018. Sub-standard portfolio was used as dependent variable while bank risk diversification, Basel risk compliance, risk transfer were used as independent variables. Panel data methodology was employed while the fixed effects model was used as estimation technique at 5% level of significance. Fixed effects, random effects and pooled estimates were tested while the Hausman test was used to determine the best fit. Panel unit roots and panel cointegration analysis were conducted on the study.   The empirical results proved that 41.7 per cent variations in the sub-sub-standard loans’ portfolio   was explained by credit risk management. From the random effect results, bank risk transfer and Basel compliance have positive relationship with sub-standard loan portfolio while risk bank risk diversification have negative relationship with sub-stand ad loan portfolio of the commercial banks.  We recommend that management of the commercial banks should be pro-active and devise effective measures of managing credit risk to reduce the incidence of sub-standard loans.  The monetary authority should monitor the Basel compliance rate and policies of the commercial banks to credit risk management

scholarly journals The Impact of the Internal Audit in Reducing Credit Risk in Commercial Banks in Kosovo

2016 ◽  
Vol 12 (4) ◽  
pp. 268
Author(s):  
Shqipdona Hashani Siqani ◽  
Edona Sekiraca
Keyword(s):  
Credit Risk ◽  
Commercial Bank ◽  
Commercial Banks ◽  
Internal Audit ◽  
Portfolio Diversification ◽  
Credit Risk Management ◽  
Loan Portfolio ◽  
Survey Results ◽  
The Republic ◽  
The Impact

Credit risk represents the vast majority of the risk in the context of estimating the capacity of the transfer of risk from commercial banks. Any commercial bank operating, in Kosovo, must have a system for managing credit risk. An important and essential process, such as the management of the credit risk, cannot be carried out without the aid of internal audit. From the survey results, it was concluded that the process of auditing the banks recommended the implementation of policies for managing credit risk of the respective commercial bank’s policy. This also include the policy of credit risk management of the Central Bank of the Republic of Kosovo, implementation of procedures, regulations and rules for credit exposure, loan portfolio diversification, training of staff of the credit risk involved in completing the loan files, etc.

scholarly journals CREDIT RISK ASSESSMENT IN THE BANK'S FINANCIAL ACTIVITY

2021 ◽  
Author(s):  
Olena Druhova ◽  
Svitlana Klepikova ◽  
Viktoriy Romaniv
Keyword(s):  
Credit Risk ◽  
Commercial Banks ◽  
Banking System ◽  
Bank Capital ◽  
Credit Risk Management ◽  
Loan Portfolio ◽  
Financial Activity ◽  
Credit Risks ◽  
Current State ◽  
Almost All

The purpose of the article is to study the current state of assessment and management of credit risk of banks, analysis of the regulatory framework governing credit risk management and the formation of reserves for active operations, as well as identifying ways to stimulate credit activity of banks in modern conditions. The main factors of credit risk by types of credit risks are presented. Particular attention is paid to individual and portfolio credit risk. The types of active operations on which determine the credit risk are defined. The general essence of commercial risk and directly credit risk of commercial banks is considered. Situations which can promote occurrence of credit risks in commercial banks are considered, and also methods and strategy of management by risks of commercial banks are developed. The article considers theoretical issues regarding the content and assessment of credit risk of the bank. The types of credit risk are identified and the characteristics of each of them are given. The complexity of the implementation and maintenance of such management systems is inversely proportional to the efficiency of the use of bank capital, that is, the more complex the method of calculating the risk – the less capital to be deducted on it. When calculating credit risk, the bank consolidates financial assets in accordance with the regulatory act - "Regulations on the determination of credit risk by banks of Ukraine for active banking operations." Indicators of EL, PD, LGD, EAD are assessed, which assess credit risk according to the regulations. The dynamics of credit risk standards of the banking system of Ukraine for 2009-2019 is considered. Statistics show that in 2019, almost all indicators of the loan portfolio are non-performing loans. Non-performing loans are loans that are doubtful or uncollectible until repayment. The quality of the loan portfolio with such a share of non-performing loans is a factor of inhibition and systemic risk. The calculations presented in the article show that state banks have the greatest credit risk, the share of non-performing loans does not decrease, even to 60%. Banks with a state share, not including Privatbank, are trying to reduce the level of lending risks. Recommendations for minimizing banking risk in financial activities are given.

scholarly journals How inefficient is an inefficient credit process? An analysis of the Italian banking system

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Peter Cincinelli ◽  
Domenico Piatti
Keyword(s):  
Credit Risk ◽  
Stochastic Frontier ◽  
Banking System ◽  
Efficient Frontier ◽  
Likelihood Method ◽  
Loan Portfolio ◽  
Content Type ◽  
Credit Lines ◽  
Lending Activity ◽  
The Interest Rate

PurposeThe paper aims to disentangle the physiological credit risk from the credit risk coming from the inefficient screening and monitoring management process. The analysis is conducted on a sample of 338 Italian banks–56 joint-stock banks (SpA), 23 cooperative banks (Popolari) and 259 mutual banks (BCCs)–over the time period 2006–2017.Design/methodology/approachThe authors use the maximum likelihood method to estimate the efficient frontier, as a set of best management credit practices, which minimises the credit risk defined on the basis of the level of loans granted, the technical structure of the loan portfolio (such as credit lines, mortgages, consumer loans and other technical loan categories) and the interest rate charges.FindingsThe empirical results show that the increase in non-performing loans (NPLs) is related both to the severe and protracted recession in Italy, which significantly reduced borrowers' capacity to service their debt, and to other factors, such as banks' lending monitoring policies with limited capacity to work-out defaulted loans.Originality/valueThe authors propose a new approach to the study of the performance of the credit process. With the stochastic frontier, the physiological credit risk, assumed by the bank according to its lending activity and management choices, is separated from the credit risk resulting from an inefficient management of the screening and monitoring process. In addition, the authors analyse the determinants of the excess of NPLs. This aspect is considered particularly original because the scientific contributions which consider the causes of NPLs have largely focused on the level of NPLs not considering the physiological part, linked to the structure of the bank's loan portfolio and its operational strategy and therefore not compressible and in any case not attributable to mismanagement or moral hazard.

scholarly journals An Incentive Mechanism Model of Credit Behavior of SMEs Based on the Perspective of Credit Default Swaps

Complexity ◽  
2020 ◽  
Vol 2020 ◽  
pp. 1-8
Author(s):  
Shenghong Wu ◽  
Pei Mu ◽  
Jiaxian Shen ◽  
Wenyi Wang
Keyword(s):  
Credit Risk ◽  
Rapid Development ◽  
Credit Default Swap ◽  
Bank Loan ◽  
Credit Risk Management ◽  
Mechanism Model ◽  
Influence Mechanism ◽  
Enterprise Credit ◽  
Credit Default ◽  
Credit Financing

The rapid development of credit default swap (CDS) market has changed the manner of credit risk management of banks to some extent and has had a new influence on the bank-enterprise credit model. In this study, the credit financing process of credit risk in small- and medium-sized enterprises (SMEs) gathers within a bank, which makes it difficult for SMEs to raise funds. On the basis of the perspective of CDS, we construct an incentive game model of bank-enterprise credit behavior and analyze the influence mechanism of the credit financing of SMEs on CDS contract coupon rate, CDS payout ratio, bank-enterprise credit effort, and loan recovery rate when considering CDS. The result shows that the CDS contract leads to insufficient supervision after a bank loan, the moral hazard of the SMEs rises, and the probability of credit default events increases. In addition, in view of CDS, the SMEs can access more credit funds.

THE IMPLEMENTATION OF AN INTEGRATED CREDIT RISK MANAGEMENT IN OPERATING IN POLAND COMMERCIAL BANKS

2015 ◽  
Vol 2 (2) ◽  
pp. 83-95
Author(s):  
Dariusz Prokopowicz
Keyword(s):  
Risk Management ◽  
Credit Risk ◽  
Commercial Banks ◽  
Analysis Model ◽  
Credit Risk Management ◽  
Loan Portfolio ◽  
Integrated Risk ◽  
Modern Information ◽  
Bank Risks ◽  
Integrated Risk Management

Since the late 90-th the value of an integrated credit risk management in commercial banks operating in Poland has become very actual. In classical terms, the integrated risk management is the identification and valuation of certain categories of bank risks associated with their activities. The using of modern information systems helpes to improve the integration of the various business segments in the banks and develope a model for risk management portfolio. The implementation of integrated risk management in relation to the loan portfolio improved process control assets of banks. Thus, a comprehensive risk management in terms of loan portfolio significantly adds risk analysis model, each credit transaction.

Sign in / Sign up

Export Citation Format

Share Document