Analysis of the Modern Credit Risk Measurement and Management of Uk Investment Banks
Analysis of the Modern Credit Risk Measurement and Management of UK Investment Banks
1. Introduction
In the morden society, risk is not an unfamiliar state for no matter individuals or Financial Institutions. Especially for investment banks, risk is an essential factor for daily operating activities. If there is no risk in bank’s daily operations, the value of the bank’s investment could only be the risk-free returns, which violates the final targets of investment banks, that is, making shareholder’s profit maximization. Thus, to increase the returns of shareholders, banks should not only take the risk and get higher returns, but also control risk to a certain level to avoid unnecessary deficit.
Many banking risks arise from mismatching. If banks achieved perfect matching, the only risk would be credit risk(obviously, mismatching is an essential feature of banking and a source of profit opportunities), as a result, credit risk is a specific risk of banking systems and becomes increasingly significant as well. Furthermore, loan portfolio, as a key source leading to credit risk, is accounted for a large amount of bank’s asset. Hence, a sufficient and suitable measurement and management method of credit risk for specific investment banks should be implemented to ensure bank’s stability and prevent banks from insolvency.
Traditional ways to measure credit risk has revealed some drawbacks using classic processes. To be more specific, quantity of the loan is not enough to measure whole credit risk, we should also consider the counterparty’s credit standing. Also, it is not available for measuring the cumulative credit risk over financial trades. (Barbara Casu, Claudia Girardone & Philip Molyneux, 2006). It is indicates that investment banks should explore more precisely approach to measure and manage credit risk. This essay will analysis the accurate ways measuring and managing credit risk and discuss the extent to which the
1. Introduction
In the morden society, risk is not an unfamiliar state for no matter individuals or Financial Institutions. Especially for investment banks, risk is an essential factor for daily operating activities. If there is no risk in bank’s daily operations, the value of the bank’s investment could only be the risk-free returns, which violates the final targets of investment banks, that is, making shareholder’s profit maximization. Thus, to increase the returns of shareholders, banks should not only take the risk and get higher returns, but also control risk to a certain level to avoid unnecessary deficit.
Many banking risks arise from mismatching. If banks achieved perfect matching, the only risk would be credit risk(obviously, mismatching is an essential feature of banking and a source of profit opportunities), as a result, credit risk is a specific risk of banking systems and becomes increasingly significant as well. Furthermore, loan portfolio, as a key source leading to credit risk, is accounted for a large amount of bank’s asset. Hence, a sufficient and suitable measurement and management method of credit risk for specific investment banks should be implemented to ensure bank’s stability and prevent banks from insolvency.
Traditional ways to measure credit risk has revealed some drawbacks using classic processes. To be more specific, quantity of the loan is not enough to measure whole credit risk, we should also consider the counterparty’s credit standing. Also, it is not available for measuring the cumulative credit risk over financial trades. (Barbara Casu, Claudia Girardone & Philip Molyneux, 2006). It is indicates that investment banks should explore more precisely approach to measure and manage credit risk. This essay will analysis the accurate ways measuring and managing credit risk and discuss the extent to which the