Talk:Credit risk

message: I wonder what you guys think of adding a section on how business credit risk is evaluated. For example, in my bank we think in terms of the 'two ways out':
# Can the applicant demonstrate an ability to make payments?
# If the applicant defaults, is there another way to get repaid?
1 is usually called "serviceability" or a servicing test, and looks to cashflow modelling, balance sheet ratios and considerations around management ability. It's like a consideration of "business as usual", or a reasonable expectation of what will happen in the future. And before you ask 'what does reasonable mean' or how we can have a 'reasonable expectation around the future', I literally mean just that. If we don't have an articulable reason, we cannot hold a belief.
2 is strictly about the saleable assets supporting the transaction, usually called "security". So if we were to realise their assets, how much of the loan are we likely to have paid down? Put another way, we're considering business failure. If the business fails, how much of our money can we get back? Often in commercial lending, there will be an unsecured component (i.e. we know we will get back less than 100%. The portion of shortfall is called the unsecured component).
Jason 08:15, 28 July 2007 (UTC)
replies: text: Good idea, go ahead - be bold!. In the contexts I use this in, the first is called various names, cash flow coverage, debt service coverage (ratio), sources of repayment, etc - all boiling down to likelihood of default (I think this is the term the credit ratings agencies use). The latter is usually loss given default or similar terms.--Gregalton 08:42, 28 July 2007 (UTC)
thread_title:  How to evaluate business credit risk 

message: The term counterparty risk redirects to this page, yet is not mentioned on the page. 
Counterparty risk, otherwise known as default risk, is the risk that an organization does not pay out on a credit derivative, credit default swap, credit insurance contract, or other trade or transaction when it is supposed to.  Even organizations who think that they have hedged their bets by buying credit insurance of some sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues.
Large insurers are counterparties to many transactions, and thus this is the kind of risk that prompts financial regulators to act, e.g. the bailout of insurer AIG.
Some sources:
* http://seekingalpha.com/article/58780-counterparty-risk-and-the-subprime-fiasco
* http://www.investopedia.com/terms/c/counterpartyrisk.asp
* http://www.opriskandcompliance.com/public/showPage.html?page=810088
Edward Vielmetti (talk) 16:35, 6 October 2008 (UTC)
replies: text: I added it to the article, using the first two sources, but could not see where to use the third. It could be expanded as I dimly recall counterparty risk being a normal risk accounted for during foreign exchange currency swaps (the trading bank would integrate all the risks at intervals and somehow keep the risk spread, or balanced between parties, so that it was at a minimum at the end of each day I think). -84user (talk) 18:01, 6 October 2008 (UTC)
thread_title:  [[Counterparty risk]] 

message: surely any employee who gets paid 30 days in arrears is taking the same credit risk as a company who sells at net-30? 87.194.198.122 (talk) 21:55, 2 December 2008 (UTC)
thread_title:  By employees 

message: Due to the lack of generally accepted guidelines and conflicting regulatory approaches to oversight, the banking industry has not developed a way to create and share credit policy standards or best practices.  The Credit Policy Institute is working with a number of senior bank credit officers, industry associations, and academic professions to launch a new 501c3 nonprofit research and education based forum to address this need - www.creditpolicyinsitute.org.  —Preceding unsigned comment added by Smtbrady (talk • contribs) 14:23, 22 March 2009 (UTC)
thread_title:  Credit Policy Institute 

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thread_title:  External links modified