A critical study of credit risk management in the First Bank of Dissertation - 2

A critical study of recognize risk counselling in the First edge of Nigeria PLC - Dissertation ExampleAll types of transactions have risk factors attached to them. If considered as an isolated case, then the loss fundament be treated as standalone. However, if a portfolio is considered like financial instruments and loans, there is the diversification effect which means risks of psyche transactions get diluted. This is because every individual transaction set upnot become a bad debt, and it is also not possible that all financial instruments of a trading book testament end up as losses caused by market movements. It is universally accepted that the sum of individual risks is less than the risk of the sum. There is also the concept of dependency, i.e. inter-related events which determines the effects of diversification. For instance, a loan can become a bad debt depending on some popular factors like the economic condition of market. Therefore to encipher the risk of portf olios, it is necessary that these common factors be monitored (Bessis, 2011, pp.25-26). Credit risk can be defined as the non-ability of a debtor or issuer of any financial instrument to make payment of the principal amount as per the terms and conditions of the denotation agreement (Greuning & Bratanovic, 2009, p.161). The loss that occurs is related to the valuation of the financial instruments and their liquidity. The financial instruments can reduce at high rate if the default is totally unexpected. The resultant loss is the difference surrounded by the pre- and post-default prices. (Bessis, 2011, p.29) Banks ar most vulner able regarding cite rating risk issue since default or delay of payments can lead to cash flow problems or can cause liquidity of the bank. Although there are many an(prenominal) aspects of finance, in the balance sheet of the bank 70 percent of it is related to credit risk management. disclose of many factors that are responsible for a banks failure , credit risk is the most common factor. A banks credit risk is mostly determined by its loan portfolio, all the same it is equally important to assess the creditworthiness of any debtor or issuer of financial instruments to understand the potential credit risk. Financial analysts and supervisory agencies of banks give much importance to credit policies designed by the Board of Directors, and how they are implemented by the managers. A credit policy needs to give a framework of the credit structure of bank, i.e. allocation of credit and management of credit portfolio. For instance, the policy should give information about how investments and pay assets are supervised, managed and reviewed. A credit policy need not be excessively conditional, so that proposals for friendliness can be placed before the board even if those proposals do not strictly catch the guidelines of the policy. A banks credit policy should have enough flexibility to be able to adapt to the changing relations between the banks standing assets and the market fluctuations (Greuning & Bratanovic, 2009, pp.161-162). There are certain standard theories of a banks credit management and they are 1) identification and estimate of potential credit risks, 2) credit policies that define the banks perspective of risk management, and 3) the parameters of the policies within which credit risk will be monitored. Generally there are three kinds of credit risk management policies. The first one has the objective of minimizing any potential risk and includes policies on concentration and large exposures, diversification, add to connected parties, and overexposure. The second set of policies targets at classifying assets. These policies make it compulsory to do periodic monitoring of the collectibility of the portfolio of credit instruments. The third set of policies is designed in the manner to set