Credit Risk

From the definition, credit risk is an aspect where borrowers fail to meet certain obligations in relation to the borrowing terms. Financial institutions like banks are majorly involved in the issuance of credit facilities like loans, and therefore credit risk is a major source of business risks for these institutions. Additionally, loans form an essential element for consideration in banks’ investment portfolios, and thus banks need to cushion themselves from any arising loss through the application of sound decision-making processes (Blommestein and Hans 135). In response to the challenges that loans pose to the business, banks devise various methods to counter the challenges in relation to credit risk. These approaches aim to create awareness, control the risks, monitor the risk, measure the risk, and ensure that customers access the loans. Banks need to avail enough capital in connection to these associated risks, which will, at the same time, sufficiently cater for all risks incurred. Bank management should be actively engaged in establishing policies for the control of credit risk in order to be risk-averse. The move to come up with policies for risk aversion is to ensure the continuity of the banks’ project in offering loans to creditors, as this is a major avenue in raising revenue.

The risk plan in connection to loan award and credit risk should recognize all related objectives to the credit earnings, quality, and, more significantly, the growth of the portfolio. In that case, the bank in question needs to identify potential target markets owing to the availability of bank features in connection to the accomplishment of the credit portfolio.

Credit risk can greatly impact financial institutions like commercial banks in the sense that credit insurance and related derivatives get altered in the process of payment. Take, for instance, a scenario where a borrower fails to honor their part of the bargain, and the loan falls due. On the same note, the inflation rate surpasses the expected inflation rate by the bank at the time of lending. The bank in question will have no option but to bear the losses arising from the loss of capital investment and accumulated interest rate (Blommestein and Hans 137). This can happen despite an insurance cover as, at most times, the insurance policy may have different terms concerning inflation and losses due to forfeiture by the borrower. In such a case, the bank gets affected in several ways. On the one hand, there is the loss of capital that affects the financial base of the company in the sense that the availability of funds for credit is reduced, and on the other hand, the bank undergoes a drastic overall loss. Banks should, in all cases, have a solid plan to combat the impact of credit risk as it may bring overwhelming challenges to the institution.

Banks in the process of investing in credit through offering loans to their clients, need to ensure that their portfolios are way secure from credit risk. All equities that form part of the business property should be shielded from all forms of risks ranging from market securities, as suggested by the journal (Blommestein and Hans 145). All investors, in all instances, including commercial banks, should engage in businesses carefully by making substantial yet critical decisions before investing in the portfolios.

Work Cited

Blommestein, Hans J. “Risk management after the Great Crash.” Journal of financial transformation 28 (2010): 131-137.

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Current Event

Throughout the semester, students will participate in current event discussions. Each group will be responsible for a current event from the Wall Street Journal ONLY.

Credit Risk

The only requirement is that the group must select a topic that is focused on capital markets and investments that may lead to a portfolio management decision. This should be an easy task with the Wall Street Journal since there is multiple capital markets stories almost every day. The topic must be substantial and must have enough information to present your topic. The paper should be no longer than 2 pages + a cover sheet.