Comparison of Different Methods of Credit Risk Management of the Commercial Bank to Accelerate Lending Activities for SME Segment

By Cipovova, Eva; Dlaskova, Gabriela | European Research Studies, October 2016 | Go to article overview

Comparison of Different Methods of Credit Risk Management of the Commercial Bank to Accelerate Lending Activities for SME Segment


Cipovova, Eva, Dlaskova, Gabriela, European Research Studies


1. Introduction

Due to the fact that banks use huge amount of external financial sources in their business models (amount of these sources reached more than 95 %), it is necessary to adjust this area by some legislative framework. This legislative framework consisting primarily of the regulatory agreements of Basel III sets legal rules which govern the capital adequacy of banks. Therefore following rules have to be followed for establishing of the effective loans portfolio of commercial banks.

The aim of this article is to quantify capital requirements of the designed portfolios with corporate loans using selected approaches of credit risk management with variable types of collaterals. Next aim was to show possibilities how to potential mitigates capital requirements in the case of transition on sophisticated methods of credit risk management.

2. Literature review

According to McKinsey (Harle et al., 2010), the cost of additional capital due to implementation of Basel III within the current state of portfolio of European commercial banks are estimated at 1,100 billion [euro] of additional Tier 1 capital, 1300 billion [euro] of short-term liquidity and 2300 billion [euro] of long-term resources. At the same time there is an estimation of a reduction in average ROE by 4% in the banking sector. According to authors, the transition to Basel III represents an impulse for banks which have not begun with improvements of their approaches for the optimal level of risk-weighted assets (RWA) yet, because these approaches make the capital and liquidity much less available and much more expensive. Certain solutions for banks (Harle et al., 2010) could be seen in a reduction of the value of risk-weighted assets (RWA) within the credit risk management. In this context, banks are particularly concerned about the loss of capital and liquidity, which are derived from ineffective implementation of the new regulation. Authors see two major events which banks may face challenges of Basel III with: the improvement of capital efficiency especially in the trading portfolio and the determination of the suboptimal liquidity management practices and Fraudulent Financial Reporting (Suryanto, 2016).

The benefit of this article is impacts quantification of the implementation of sophisticated approaches to credit risk management. In the article, the structure of elemental designed portfolio is calibrated and appropriate capital requirements in order to optimize the equity usage in banks are gradually quantified (Belas, Cipovova, Novak, & Polach, 2012).

The current results demonstrate that the requirement of capital could decrease by approximately 30 %, which means using of an internal rating model could increase the profitability on equity up to 13 %, depending on the structure of the assets, the amount of the interest margins and the profitability ratio. Even saving capital through "the improved credit risk management", which was considered one of the important stabilizing elements in this system, does not work in banking practice and therefore the system of internal ratings should be adjusted to the new regulatory conditions (Belas, & Cipovova, 2013, Thalassinos, Liapis & Thalassinos, 2014).

The issue of capital adequacy of commercial banks, the quality and functioning of the models for credit risk measurement in the macro-economic framework examined the study (Belas, & Polach, 2011, Thalassinos et al., 2010).

3. Methodology

According to Basel II, commercial banks can use not only Standardized approach (STA) but also Internal Rating Based Approach (IRB) for credit risk measurement and for calculation of required amount of equity.

Standardized approach for credit risk measurement exactly determines risk weights for credit assets. For example, for corporate loans applies: if the bank has available rating scores of recognized rating agency (STA+ ER approach), this rating classifies individual exposures (EaD) to six level of credit quality. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Note: primary sources have slightly different requirements for citation. Please see these guidelines for more information.

Cited article

Comparison of Different Methods of Credit Risk Management of the Commercial Bank to Accelerate Lending Activities for SME Segment
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen
Items saved from this article
  • Highlights & Notes
  • Citations
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA 8, MLA 7, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Search by... Author
    Show... All Results Primary Sources Peer-reviewed

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.