Credit Risk Management
Derivatives cannot reduce the risks that go with owning vola-
tile assets, but they can determine who takes on the specula-
tion and who avoids it.
Peter L. Bernstein (1998)
In 1989, economists at Olympic Bank, a major Greek commercial loan bank, grew concerned about its rapidly growing loan portfolio in the emerging economies of the Balkan region and the credit risk exposure associated with it. In particular, bank economists raised doubts about the ability of a number of corporate borrowers in the region to repay their loans due to deteriorating domestic macroeconomic conditions.
Olympic Bank's problem is neither new nor unique. As the extension of credit has always been at the core of the banking operations, credit risk management has been the focus of banking risk management, and that applies both to the bank loan and to the investment portfolio. Banks must carefully craft their lending strategy, screen their borrowers, determine the investment and lending