Credit Risk

Credit risk refers to the risk that a borrower or counterparty cannot fulfill its contractual obligations, resulting in losses to creditors or investors. Credit risk exists in various financial markets and products, such as bank loans, corporate bonds, derivatives, trade finance, etc. Credit risk not only affects individual counterparties, but also affects the stability of the entire financial system. Therefore, the management and reduction of credit risk is an important task for financial institutions and regulatory agencies.

The management and reduction of credit risk involves the following aspects:

Credit evaluation: Credit evaluation refers to the process of analyzing and evaluating the repayment ability and credit status of a borrower or counterparty. The purpose of credit assessment is to determine the size and possibility of credit risk and to set reasonable interest rates and conditions based on different credit ratings. Credit assessment can be carried out internally or externally, such as using financial statements, credit records, market information, ratings from professional institutions, etc.

Credit Monitoring: Credit monitoring is the process of continuously monitoring and updating the credit profile and behavior of a borrower or counterparty during a transaction. The purpose of credit monitoring is to promptly discover and deal with any risk factors that may lead to default or loss, such as changes in the operating environment, deterioration of financial conditions, delays in repayment, etc. Credit monitoring can be carried out on a regular or irregular basis, such as using financial reports, on-site inspections, market dynamics, early warning systems, etc.

Credit transfer: Credit transfer refers to a method of transferring part or all of the credit risk to a third party. The purpose of credit transfer is to diversify and reduce the credit risks borne by oneself, and to improve capital efficiency and liquidity. Credit transfer can be carried out in a variety of ways, such as using guarantees, guarantees, mortgages, reinsurance, credit derivatives, etc.

Credit control: Credit control refers to the method of setting and enforcing relevant rules and restrictions based on one's own risk tolerance and strategies. The purpose of credit control is to prevent excessive exposure to high-risk counterparties or markets and ensure compliance with laws, regulations and internal policies. Credit control can be done in a variety of ways, such as using credit lines, concentrations, exposures, tiering systems, approval processes, etc.

Credit risk is one of the inevitable risks in financial activities, but through effective management and reduction, it can be controlled within a reasonable range and create more value and opportunities.

How is credit risk measured and reported?

The measurement and reporting of credit risk refers to the process of quantitatively and qualitatively assessing and disclosing the size and change of credit risk. The purpose of credit risk measurement and reporting is to provide accurate and complete information about credit risk and to support credit risk management and decision-making. The measurement and reporting of credit risk involves the following aspects:

Credit risk indicator: Credit risk indicator refers to a numerical value or ratio that reflects the size and change of credit risk. Credit risk indicators can be divided into two categories: indicators based on historical data, such as default rate, default loss rate, recovery rate, etc.; indicators based on predictive models, such as default probability, credit value risk, expected loss, etc. Credit risk indicators can be classified and summarized according to different dimensions, such as transaction parties, products, markets, industries, regions, etc.

Credit risk assessment: Credit risk assessment refers to the process of interpreting and evaluating credit risk indicators. The purpose of credit risk assessment is to identify and analyze the main factors and trends affecting credit risk, and to compare the differences and changes between different time periods or different groups. Credit risk assessment can be performed in a variety of ways, such as using statistical analysis, sensitivity analysis, scenario analysis, stress testing, etc.

Credit risk reporting: Credit risk reporting refers to the process of presenting credit risk indicators and assessment results to relevant parties in a standardized and clear form. The purpose of credit risk reporting is to increase the transparency and comparability of credit risk and to facilitate the supervision and communication of credit risk. Credit risk reporting can be done in a variety of ways, such as using tables, charts, text, etc.

Credit risk is one of the risks that cannot be ignored in financial activities, but through effective measurement and reporting, it can be visualized and quantified, and the efficiency and effectiveness of credit risk management can be improved.