JOURNAL OF INTERNATIONAL BUSINESS RESEARCH AND MARKETING

Chijoriga posited that quantitative models make it possible to among others,numerically establish which factors are important in explaining default risk, evaluate the relative degree ofimportance of the factors, improving the pricing of default risk, be more able to screen out bad loans application andbe in a better position of calculate any reserve needed to meet anticipated future loan losses.

Establishing a clear process for approving new credit and extending the existing credit Heffernan, andmonitoring credits granted to borrowers Mwisho, are considered important when managing credit risk Heffernan, Instruments or tools such as covenants, collateral, credit rationing, loan securitization andsyndication have been used by banks in developing countries in controlling credit losses. Benveniste and Bergar It has also been identified that high-quality credit risk management staff are critical to ensure that the depthof knowledge and judgment needed is always available, thus ensuring the successfully management of credit risk inbanks Koford and Tschoegl, and Wyman, Most credit risk officers in the banking industry analyse factors such as; inflation, the level of interestrates, the GDP rate, market value of collaterals among others, for banks in mortgage financing.

Also, traditionalfinancial management texts posit that credit manager would take note of the five Cs of credit — character, capacity,capital, collateral and conditions to evaluate the probability of default Casu et al,; Zech, These factorsare in line with the arbitrage pricing theory of Stephen Ross which is the most applicable to loan portfoliomanagement.

Types of risks in banking - Risk Management in Banking sector - Types of risks in banking sector

That is to say that, how loans are originated,serviced, supervised and collected. Banks must bear in mind that a good lending policy is not overly restrictive, butallow for the presentation of loans to the board that officers believe are worthy of consideration but which do not fallwithin the parameters of written guideline. A sound lending policy should consider; limit on total outstanding loans,geographic limit, credit concentration, distribution by category, type of loans, maturity, loan pricing, lendingauthority, appraisal process, maximum ratio of loan amount of the market value of pledged, recognition,impairment, collection and financial information.

The optimal level or point onthe risk return relationship depends on the risk preferences of banks. Which are influenced by the regulators whowould like to minimize the risk and also by shareholders investors who prefer high returns. Banks can vary theirportfolio risk-return trade-offs by making new loans, selling existing loans and using derivatives especially in thedeveloped countries like U.

However there are shortcomings in this modern portfolio theory when applied to loan portfolios. First of allmanagers perceive risk in term of cedi or dollar loss while standard deviation which is in the efficient portfoliofrontier defines risk in terms of deviation from expected return, hence it is not intuitive. Secondly, the use ofstandard deviation assumes normal distribution whereas the distributions of returns in loan portfolio are skewed. Due to these shortcomings in the modern portfolio theory, Value-at-Risk VaR becomes alternatives whichovercome the shortcomings mentioned.

VaR measures portfolio risk by estimating the loss in line with a givensmall probability of occurrence.

A higher risk means a higher loss at the given probability. VaR is a forecast of agiven percentile usually in the lower tail such as 99th percentile of the distribution of returns or losses on aportfolio over some period.

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However, when returns are normally distributed, VaR conveys exactly the same as the information as standarddeviations. Hence, the VaR appeal can be consistent with modern portfolio theory. In this way, VaR method is seento be consistent with modern portfolio theory. Thechoice of confidence level of VaR shows risk aversion of a bank. The optimal level of VaR for a portfoliorepresents the optimal level of capital to back the portfolio.

VaR approach is having ongoing studies by researchers 3 4. The optimal amount of capital or equity to cushenagainst the desired level of risk can be identified, given the risk presence of a bank. The VaR approach is the mostpreferred to be used when the market risk is measured Schacter, Zech, Markowitz, Hull, Banks have three typesof capital.


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That is book capital, regulatory capital and economic capital. Economic capital serves as a cushion tounexpected losses. Becausebanks are competing globally, it was thought vital to create equal wave length by taking regulation uniformthroughout the world. In the capital requirements for credit risk were modified to incorporate netting.

In the Accord was modified to factor in a capital charge for market risk. Sophisticated banks could base their capitalcharge on a value-a-t risk VaR calculation, Hull, In the Basel committee suggested some changeswhich were intended to be operationalised in The new capital accord Basel II framework under Pillar 1offers three 3 main approaches for the calculation of capital requirements. The Bank of Ghana BoG has done a number of consultations in the Ghanaian banking industry and has concludedto adopt the standardized Approach for computing the capital requirement for credit risk.

This approach has two 2 main methods. These are internal credit ratings approach which is subject to the prior explicit approval of thesupervisor and the other alternative is the use of the external credit assessment approach. The Capital AdequacyFramework for capital requirement directive issued by Bank of Ghana BoG, , stipulated that locallyincorporated licensed banks were to adopt the standardized approach with the credit ratings specified in calculatingtheir capital requirements.

BoG recognized both the simple and comprehensive approaches for credit mitigation.

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Italso specified eligible final collateral, allowed as credit risk mitigants for the purpose of calculating capitalrequirements for credit risk. Consequently, the Basel II has been in operation since the beginning of ,representing the most significant change to the supervision of banks. The focus is on establishing the capital banksrequire, given their risk profiles and improve risk management. The new capital requirements may lead to animproved buffer for risk absorption in the industry. Angbazo stressedthat banks with larger loan portfolio appear to require higher net interest margin to compensate for higher risk ofdefault.


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  • Thesis on credit risk management in ghanaian banks - Research Paper.

Meanwhile, Ducas and McLaughlin had earlier argued thatvolatility of bank profitability is largely due to credit risk. Specifically, they claim that the change in bankperformance or profitability are mainly due to changes in credit risk because increased exposure to credit risk leadsto fall in bank performance and profitability. Heffernan stressed that credit risk is the risk that an asset or loan becomes irrecoverable, in the case ofoutright default or the risk of delay in servicing of loans and advances.

Thus, when this occurs or becomespersistent, the performance, profitability, or net interest income of banks is affected. Consequently, this study seeksto find out the relationship between credit risk and bank performance of some selected banks in Ghana. Theprimary data used for the study were from secondary sources especially from financial statements of the banks.

Credit Risk Management In Commercial Banks Thesis Writing - - Fagor Automation - USA

Datawas obtained from six banks in Ghana. Purposive sampling technique was used in selecting these six banks. The basicdata was obtained from the Annual Report of the banks from — The researcher also controlled for theeffects of other factors on firm profitability. These include bank size, bank growth rate and the choice of capitalstructure. Generic factors that affect credit risk are default, downgrade,market and recovery risk. The extreme form of downgrade is default. If the ratios increase continuously theyshow the capacity of a bank continuously deteriorating hence, indicate poor credit risk management.

However, if theratios decrease continuously over a period, then it implies that a bank has adequate capacity to absorb loan losses,and hence indicate good credit risk management. The study used ROE asindicator for bank profitability. The average standard deviation performance of banks in the sample was 0.

This depicts that equity shareholders were able to generate a return of It also shows that the payback period of equity holders is about 3 years. Even though the average performance canbe considered as good, some banks recorded abysmal performance. The minimum recorded profitability was as lowas Apparently some banks performed poorly as compared to that ofthe industry. This can be considered as high since on the average the proportion of loans impaired is about one-third of total loans and advances.

This casts a slur on the quality of loans given out by banks in this sample. Theratio of non-performing loans to total loans and advances was astonishing. As high as This confirms the numerous assertions that there is high level ofdefault among borrowers in Ghana, a reason which is mostly given by banks as the cause of high interest rate eventhough the prime rate has fallen significantly.

This could be due to macroeconomic factors. This notwithstanding, it isalso clear that the high level of credit risks as shown by the above two indicators cannot be said to be widespreadamong the firms in the sample because of the high levels of standard deviations. Furthermore, pre-provision profits 5 6. Firm size log of total asset was This shows asignificant growth in the industry. Debt capital represents a greater proportion of bank total capital.

It representsabout The lowstandard deviation 0f 0. In this situation the coefficient estimates may change erratically in response to smallchanges in the model or the data.