...Basel Committee on Banking Supervision International Convergence of Capital Measurement and Capital Standards A Revised Framework Comprehensive Version This document is a compilation of the June 2004 Basel II Framework, the elements of the 1988 Accord that were not revised during the Basel II process, the 1996 Amendment to the Capital Accord to Incorporate Market Risks, and the 2005 paper on the Application of Basel II to Trading Activities and the Treatment of Double Default Effects. No new elements have been introduced in this compilation. June 2006 Requests for copies of publications, or for additions/changes to the mailing list, should be sent to: Bank for International Settlements Press & Communications CH-4002 Basel, Switzerland E-mail: publications@bis.org Fax: +41 61 280 9100 and +41 61 280 8100 © Bank for International Settlements 2006. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN print: 92-9131-720-9 ISBN web: 92-9197-720-9 Contents Introduction ...............................................................................................................................1 Structure of this document........................................................................................................6 Part 1: Scope of Application .....................................................................................................7 I. Introduction.....................
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...CREDIT RISK MANAGEMENT Banks are in the business of risk management and, hence, are incentivized to develop sophisticated risk management systems. The basic components of risk management system are identifying the risks the bank is exposed to, assessing their magnitude, monitoring them, controlling/mitigating them using a variety of procedures and setting aside capital for potential losses. RBI prescribed risk management framework in terms of: a) Asset-Liability Management practices. b) Credit Risk Management. c) Operational Risk Management. d) Stress testing by Indian Banks in the perspective of international practices. BANKING RISKS: It can be categorized into: i) Business-related Risks. ii) Capital-related Risks. Business Related Risks: The business related risks to which banks are exposed are associated with their operational activities and market environment. They fall into six categories: namely, a) Credit Risk b) Market Risk c) Country Risk d) Business Environment Risk e) Operational Risk f) Group Risk Note: Market Risk comprising of interest rate risk, foreign exchange risk, equity price risk; commodity price risk and liquidity risk; Credit Risk: Credit risk, a major risk faced by banks, is inherent to any business of lending funds to individuals, corporate, trade, industry, agriculture, transport, or banks/financial institutions. It is defined as the possibility of loses associated with a diminution in the credit...
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...supervisor in the host organization Mr. Md. Abdul Hannan, I decided to work on the policies and practices of credit risk management and appraisal process of IDLC. I strongly believe that, this study will enrich my knowledge in the very crucial area of the financial institutions (FIs): Credit Risk Management. 1.2 OBJECTIVES OF THE REPORT • MAIN OBJECTIVE: The main focus of the report is on credit risk management practices and credit appraisal procedure of IDLC Finance Limited. • SPECIFIC OBJECTIVES: The specific objectives are: ❖ To look at the portfolio of sectors financed by IDLC ❖ To evaluate the norms and rules practiced in assessing the borrower ❖ To compare the credit policy of IDLC with the credit policy guideline for the financial institutions (non-bank) of Bangladesh Bank and to identify the extent to which IDLC follows this guideline. ❖ To compare the credit risk management practices of IDLC Finance Limited with that of Industrial Promotion and Development Company of Bangladesh Limited, as a sample financial institution, to get an idea of the common deviations of credit risk management practices of the FIs from the central bank guideline. ❖ To summarize the fact findings and to give recommendations in improving the existing procedures wherever required. 1.3 SCOPE OF THE STUDY In broad the report highlights the credit risk management practices and...
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...empirical and theoretical literature on the effect of credit risk management on financial performance, and introduces an overview of BancABC and its credit risk management practices 2.2Brief Company overview ABC Holdings Limited is the parent company of a number of banks operating under the BancABC brand in Sub-Saharan Africa, with operations in Botswana, Mozambique, Tanzania, Zambia and Zimbabwe. A group services office is located in South Africa.Historically, BancABC was a merchant bank offering a diverse range of services including wealth management, corporate banking, treasury services, leasing, asset management, and stock broking.ABC Holdings had Its primary listing on the Botswana Stock Exchange, and a secondary listing on the Zimbabwe Stock Exchange (BancABC annual report 2009) During 2014, the ABC Holdings Group was acquired by Atlas Mara. As at 31 December 2014, Atlas Mara had a 98.7% equity stake in ABC Holdings, held directly (60.8%) and indirectly (37.9%). Subsequent to the takeover, ABC Holdings was delisted from the Botswana Stock Exchange on 30 January 2015, and from Zimbabwe Stock Exchange on 12 February 2015.Atlas Mara is a British Virgin Islands registered company with a standard listing on the London Stock Exchange(BancAbc Annual report 2014) The seeks to review the credit risk management methods implemented by the bank . Definition of terms 2.3.1Credit According to Onyeagocha (2001), the term credit is used specifically to refer to the faith placed...
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...Credit Risk Management CHAPTER: ONE ORIENTATION TO THE REPORT CHAPTER-1 Orientation to the Report 1.1 THE AUTHORIZATION FACT Internship is a compulsory requirement for everybody pursuing a BBA degree at University of Dhaka. The Internship program includes organizational attachment period of 12 weeks and report writing period of 4 weeks. I am working with the Operations Divisions of IDLC Finance Limited. After consultation with my faculty advisor Mr. Md. Nazim Uddin Bhuiyan and my supervisor in the host organization Mr. Md. Abdul Hannan, I decided to work on the policies and practices of credit risk management and appraisal process of IDLC. I strongly believe that, this study will enrich my knowledge in the very crucial area of the financial institutions (FIs): Credit Risk Management. 1.2 OBJECTIVES OF THE REPORT • MAIN OBJECTIVE: The main focus of the report is on credit risk management practices and credit appraisal procedure of IDLC Finance Limited. • SPECIFIC OBJECTIVES: The specific objectives are: ❖ To look at the portfolio of sectors financed by IDLC ❖ To evaluate the norms and rules practiced in assessing the borrower ❖ To compare the credit policy of IDLC with the credit policy guideline for the financial institutions (non-bank) of Bangladesh Bank and to identify the extent to which IDLC follows this guideline. ❖ To compare the credit risk management practices of IDLC Finance Limited with that of Industrial Promotion and Development Company...
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...agreement. It occurs when bad credit risks (firms with poor investment channels and high inherent risks) become more probable to acquire loans than good credit risks (firms with better investment opportunities and less inherent risks). Moral Hazard is the associated problem of information asymmetry that arises after the parties to a contract reach an agreement. It arises when the borrower has an incentive to breach the loan covenants by investing in ‘immoral projects’ which are unacceptable to the borrower and also have a high possibility of default. Both these risks occur because of the lenders’ imperfect knowledge about the borrowers and their activities. For Financial institutions, information asymmetry inherent to credit disbursement is a key risk that needs to be managed. II. Bangladesh Bank Guidelines for Credit Risk Management As the central bank and apex regulatory body for the country's monetary and financial system, Bangladesh Bank provides a number of recommended policy and procedural guidelines to the financial sector that are directional in nature and aims to improve the risk management culture. Policy guidelines of Bangladesh Bank include Lending Guidelines, Credit Assessment & Risk Grading, Approval Authority, Segregation of Duties and Internal Audit while Procedural Guidelines include Credit Approval, Administration, Monitoring and Recovery. III. Credit Risk Management System of Trust Bank Limited The Risk Management Committee of Trust Bank Limited...
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...than ever for risk managers to have a clear understanding of sound credit risk management principles and processes. The Handbook of Credit Risk Management presents a comprehensive overview of the practice of credit risk management (CRM) for large institutions. In this hands-on resource, Sylvain Bouteillé and Diane Coogan-Pushner—noted experts on the topic of financial risk management—offer a comprehensive framework and solutions helpful not just for financial institutions, pension funds, or other institutions with large invested asset portfolios, but also for non-financial corporations or any organization having critical customer, supplier, banking, or counterparty relationships. The Handbook is written in a straightforward, accessible style and presented in a logical format that is consistent with a commonly employed risk management framework. This reliable resource offers a holistic treatment of CRM and includes a checklist of nine key questions that must be answered before accepting any transaction generating credit risk. In addition, the authors outline the four sequential steps to the management of credit risk—origination, credit assessment, portfolio management, and mitigation and transfer—and show how these steps must interact to protect an organization's balance sheet. Comprehensive in scope, this book covers a wealth of topics including fundamental and alternative credit analysis, securitization, credit portfolio management, economic capital, credit insurance, surety...
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...CREDIT RISK MANAGEMENT BY COMMERCIAL BANKS IN KENYA, A COMPARATIVE STUDY OF KCB AND COOPERATIVE BANK, CHUKA BRANCHES BY AMULYOTO FRANKLIN UNGAYA (BB1/02596/10) A Research Proposal Submitted to the Department of Business Administration in Partial Fulfillment of the Requirement for the Award of the Degree of Bachelor of Commerce (Banking and finance option) of Chuka University CHUKA UNIVERSITY AUGUST, 2013. DECLARATION AND APPROVAL This research proposal is my own original work and has not been presented for a degree in any other university, either in part or a whole. Amulyoto, F. U. Signature……………………………… Date…………………………………… APPROVAL This research has been submitted for examination with the approval of the following university supervisor: MR. NGENO K. W. A. Department of Business Administration Chuka University Signature………………………… Date……………………………… ACKNOWLEDGEMENT The writing of this proposal was made possible through support and encouragement from various persons. I sincerely thank my creator, the Almighty God who has given me grace to carry out my research study. I would also like to thank my supervisor Mr. Ngeno. Through his guidance and correction I was able to come up with this proposal. The gratitude is profound. Special thanks to everyone else who’s input in this work cannot go unmentioned. DEDICATION This research is dedicated to my mother, Mrs. Judith Amulyoto. TABLE OF CONTENTS ...
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...Credit risk management Principles for the Management of Credit Risk I. 1. Introduction While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties. This experience is common in both G-10 and non-G-10 countries. 2. Credit risk is most simply defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance with agreed terms. The goal of credit risk management is to maximise a bank’s risk-adjusted rate of return by maintaining credit risk exposure within acceptable parameters. Banks need to manage the credit risk inherent in the entire portfolio as well as the risk in individual credits or transactions. Banks should also consider the relationships between credit risk and other risks. The effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any banking organisation. 3. For most banks, loans are the largest and most obvious source of credit risk; however, other sources of credit risk exist throughout the activities of a bank, including in the banking book and in the trading book...
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...Executive Summary Eastern Bank’s tagline is “Simple Math”. But it is not so simple to serve the borrowers with the right package. A bank’s major liability is to deliver significant returns to their depositors. Unlike returns to shareholders, this return is promised. Unless delivered, depositors may take back the return with a vengeance; bankrupting the bank in the process. The banks developed various form of debtor selection processes to protect themselves against depositors grudge, i.e. delinquency of borrowers. CRG (Credit Risk Grading) and CRR (Credit Risk Rating) together makes one of those processes. This report is titled “Predicting Delinquency of EBL’s Corporate Customers.” EBL is one of the leading private commercial banks of Bangladesh. After starting its operation in 1992, the bank established itself as one of the most technologically advanced banks of the country. EBL has been offering diverse portfolio of products to its customer. CRG process is a borrower selection process advised by Bangladesh Bank. Private commercial banks in Bangladesh use CRG to predict the possibility of delinquency in the form of CRR. EBL uses the same process. This report first develops a model to test the CRR against financial data of a firm. Data obtained from 35 borrowers of EBL were used to run a linear regression taking CRR ratings of respective firms as dependent variable. Running the regression, the model shows that CRR of a firm does not reflect the firm’s financial data properly...
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...Principles for the Management of Credit Risk Basel Committee on Banking Supervision Basel September 2000 Risk Management Group of the Basel Committee on Banking Supervision Chairman: Mr Roger Cole – Federal Reserve Board, Washington, D.C. Banque Nationale de Belgique, Brussels Commission Bancaire et Financière, Brussels Office of the Superintendent of Financial Institutions, Ottawa Commission Bancaire, Paris Deutsche Bundesbank, Frankfurt am Main Bundesaufsichtsamt für das Kreditwesen, Berlin Banca d’Italia, Rome Bank of Japan, Tokyo Financial Services Agency, Tokyo Commission de Surveillance du Secteur Financier, Luxembourg De Nederlandsche Bank, Amsterdam Finansinspektionen, Stockholm Sveriges Riksbank, Stockholm Eidgenössiche Bankenkommission, Bern Financial Services Authority, London Bank of England, London Federal Deposit Insurance Corporation, Washington, D.C. Federal Reserve Bank of New York Federal Reserve Board, Washington, D.C. Office of the Comptroller of the Currency, Washington, D.C. European Central Bank, Frankfurt am Main European Commission, Brussels Secretariat of the Basel Committee on Banking Supervision, Bank for International Settlements Ms Ann-Sophie Dupont Mr Jos Meuleman Ms Aina Liepins Mr Olivier Prato Ms Magdalene Heid Mr Uwe Neumann Mr Sebastiano Laviola Mr Toshihiko Mori Mr Takushi Fujimoto Mr Satoshi Morinaga Mr Davy Reinard Mr Klaas Knot Mr Jan Hedquist Ms Camilla Ferenius Mr Martin Sprenger Mr Jeremy Quick Mr Michael Stephenson Ms Alison...
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...An internship report on “Credit risk management practices in Sonali Bank Ltd.” Executive Summary Sonali Bank Ltd. is the largest state owned commercial bank in Bangladesh with a total of 1203 branches. Total of 858 branch in rural and 343 branch in urban area. The functions of the bank covered a wide range of banking and functional activities to individual, firms, corporate bodies, Multinational agencies and the rural area. The bank provides more than 21 types of free services on behalf of the government of Bangladesh through its rural and urban branches as part of their commitment to society. Sonali bank Ltd. follows the rules and regulation prescribed by the Bangladesh bank. To manage credit risk, the Bank applies credit limits to its customers and obtains adequate collaterals. Credit risk in the Sonali Bank Ltd.'s portfolio is monitored, reviewed and analyzed by the Credit Risk Management (CRM). Sonali Bank Ltd. has established Asset-Liability Management Committee (ALCO) to determine the maximum risk exposure. Management is aware about guidelines of Bangladesh Bank and implemented new capital accord BASEL-II. Sonali Bank Ltd. constantly monitors, reviews and analyzes its credit portfolio to minimizing potential losses and ensuring efficient credit process. To manage the Non-Performing Loans (NPL), Sonali Bank Ltd. has a comprehensive remedial management policy, which includes a framework of controls to identify weak credits and monitoring of these accounts constantly...
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...LONDON SCHOOL OF BUSINESS AND FINANCE CREDIT RISK MANAGEMENT OF NON-BANKING FINANCIAL INSTITTUTION IN GHANA (A CASE STUDY OF TF FINANCIAL SERVICES) BY STEPHEN KWADWO NTIRI A Thesis Submitted to the London School of Business and Finance in Partial Fulfilment of the Requirement for the MBA Degree in Financial Services MARCH 2010 DECLARATION I Stephen Kwadwo Ntiri hereby declare that except for references to other people’s work, which have duly been acknowledged, the work presented here was carried out by me, MBA student of Financial Servies at the London School of Business and Finance (LSBF), under the supervision of Randolph Metz-Johnson. I also declare that this work has never been submitted partially or wholly to any other institution for the award of a certificate. …………………………………………… ……………... Stephen Kwadwo Ntiri Date (Student) ………………………………………… …………… Randolph Metz-Johnson Date (Supervisor) Dedication This research project is dedicated to Almighty God for His abundant blessings and protection given me throughout this study, and also to my family for the support I received from them. Acknowledgement I am most grateful to Almighty God who through His infinite mercy and love guided me throughout the duration of the programme. I wish to acknowledge the help and encouragement I got from the entire staff of TF Financial Services, especially Mr. Benjamin Turkson, which has enabled me to complete this work. I also want to thank my wife, Esther Yamoaba...
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...INTERNSHIP REPORT ON CREDIT RISK MANAGEMENT OF DHAKA BANK LIMTED [pic] EXCELLENCE IN BANKING DEPARTMENT OF FINANCE & BANKING UNIVERSITY OF CHITTAGONG CHITTAGONG. CREDIT RISK MANAGEMENT OF Preface The banking sector of Bangladesh is dominated by commercial banks with huge debt burdens. Inefficiency in loan sanctioning, expansion of preferential loans, and poor classification and administration of loans has led to the slow recovery of credit extended by the banks. To restore efficiency and accountability in this sector, an effective credit risk management system is necessary. To manage credit risk efficiently Bangladesh Bank has provided a guideline for CRM. Besides, Basel Committee on Banking Supervision has set a guideline on Sound credit risk assessment and valuation for loan in order to encourage banking supervisors globally to promote sound practices for managing credit risk. This paper presents a comparative picture of credit risk management of Dhaka Bank Limited with Bangladesh Bank’s guidelines and Basel Committee for Banking Supervision’s (BCBS) guideline regarding Credit Risk Management. This report also provides an overview of the Credit Risk Management of DBL. In this report DBL’s credit risk management system is analyzed into three sections. First of all the policy guidelines have been analyzed and compared with Bangladesh bank’s guideline. After that the organizational structure & responsibilities have been analyzed...
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...ADVANCING CREDIT RISK MANAGEMENT THROUGH INTERNAL RATING SYSTEMS At Bank for Investment and Development of Viet Nam JSC (Transaction office no.8 ) Table of Contents Foreword Part I : Overview of Bank Credit risk management and The theoretical basis of Internal rating systems 1. The activities of commercial banks 1.1. The concept of a commercial bank. 1.2. Operation and Performance of Commercial Banks 2. Managing Operational risk in banking 3. Definition of an Internal Rating System 4. Rating models 4.1. Outlines of Rating Models 4.2. Validation of Rating Models 4.3. Adjusting Rating Models 5. Uses of Internal Rating Systems 6. Benefits of Using an Internal Rating System Part II : Current situation of Credit activities and Internal rating systems at BIDV ( Transaction office no.8 ) 1. General introduction of Bank for Investment and Development of Viet Nam JSC ( BIDV ) 2. Current business status of BIDV 2.1. Socio-economic situation in the period of 2008-2012 2.2. Situation of BIDV business operations in the period of 2008-2012 3. Situation of BIDV Credit quality in the period of 2008 – 2012 3.1. Current situation of BIDV Credit quality 3.2. Achivement of BIDV Credit activities 3.3. SWOT analysis on Credit activities of BIDV branches 4. Current situation of Internal rating systems at BIDV 4.1. Current situation of Credit Risk Management at BIDV 4.2. Current situation of Customer rating systems at BIDV (Transaction office no. 8) ...
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