Essay on the Principles for the Management of Credit Risk

ESSAY ON THE PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK

Faculty of financial engineering

Bogotá

2017

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PRINCIPLES FOR THE MANAGEMENT OF CREDIT RISK:

The credit risk, according to the author, is defined as the ability of a borrower's bank or a counterparty fails to meet its obligations in accordance with the agreed terms. The objective of the credit risk management is to maximize the adjusted rate through the maintenance of the risk exposure within acceptable parameters, therefore, banks must also take into account the relations between credit risk and other risks in order to run an effective management and on the experience of the supervisors, are not repeated certain key problems with severe credit losses in a banking system, as these tend to reflect simultaneous problems in various areas, such as concentrations, the failures of due diligence and the inadequate supervision.

We know that each financial institution struggle day by day to cover the risks that may occur and how to prevent these to materialize, however, the credit risk is one of the biggest problems that can pass through, as it directly affects the provision of utilities of a bank, on the one hand if your customers do not make payments for the entity will have to have a greater coverage, that is to say should be provisioned for each client according to the height of the Moratorium; and on the other hand, if the bank fails to comply with the conditions of the loans can lead not only to the substantial monetary penalties but also trigger the legal risk And reputation.

Although there are different mechanisms to minimize the risk, we cannot avoid that at some time to materialize and although each risk situation is different, we need to learn from these events so as not to fall into the same errors again and have the clarity that, although a higher risk is assumed, the greater will be the profitability, at some point this curve inversely proportional tends to generate an opposite effect almost chaotic in the financial system; this is why the risk assumed or transferred must be measured and to maintain this balance we must take into account the principles of management that teaches the author, due to the fact that the economy through time is changing, therefore the policies and Rules of the system as well.

The principle number 13 of the risk management evaluation, we confirmed the above, indicate that banks must take into account