It all starts with strong Commercial, Corporate and Institutional Relationships…
Today’s Credit Risk Management and Relationship & Portfolio Managers really need to be on top of their game. That’s because Credit Risk Management and Relationship & Portfolio Management is more than just long lunches and social calls. Staying close to your customer also means staying abreast of the major families of transactions that generate credit risk for banks.
How is this so?
Commercial, Corporate and Institutional Relationship & Portfolio Managers deal with complex and challenging risks environments that range from the most common source of credit risk for banks, which includes issuing loans, credit lines, and other forms of credit; to activities, such as buying and selling financial instruments such as bonds, derivatives, and foreign exchange; taking on credit risk through underwriting activities, such as issuing and selling securities like stocks and bonds; settlement and clearing trades and the clearing of payment and securities transactions; accepting deposits, and providing cash management services and providing guarantees, such as letters of credit, to support customers transactions.
Credit Risk Management Risk Families
Each family of transactions requires different risk management techniques. It’s important for Commercial, Corporate and Institutional banks to have the skilled and knowledgable Relation and Client Portfolio Managers, both equipped with the skills, systems and processes in place to identify and manage the credit risk associated with each type of transaction.
Credit Risk Management means avoiding Costly mistakes
It’s important when banks engage in non-standard credit-related activities beyond traditional lending and borrowing and things get a bit more complex. That’s when practises like securitisation and factoring come in handy. This is when banks pool together a group of assets, such as mortgages or credit card receivables, and then issue a Security (or securities) backed by those assets.
- Factoring, is the sale of a company’s accounts receivable at a discount to a third party;
- leasing financing, is the provision of financing to a lessee for the purpose of acquiring an asset such as a piece of equipment or real estate;
- project financing, which is the provision of financing for a specific project or venture, such as the construction of a power plant or a mine;
- mezzanine financing, is a type of financing that combines debt and equity. Banks often use this in finance leveraged buyouts, recapitalisations and other transactions;
- Private equity, is capital to private companies (as opposed to publicly traded or listed companies)
- hedge funding, which are investment funds that use a variety of strategies to generate returns.
Each of These activities can bring additional revenue but also can present new challenges and risk exposures, so banks need to have robust risk management systems and processes in place to manage the credit risk associated with these activities.
Relationship & Portfolio Managers need Specialist skills to Manage risks
Bankers rely on a variety of risk management techniques and practices including segmentation, which involves breaking down the credit portfolio into different segments, such as by industry or geographic location, to identify and manage specific types of risk.
Evaluating potential borrowers creditworthiness carefully. Scrutinise financial statements and other relevant information and grade each Risk. This means assigning a risk grade to each borrower based on the risk they pose. The risk grade sets the right terms and conditions for the loan.
Banks may also opt to set limits on the amount of credit that can be extended to a borrower, or the total amount of credit that can be extended to a particular industry or geographic area and regularly monitor the credit portfolio to identify and address any emerging risks or changes in the creditworthiness of borrowers.
A test in time, may save a lot of stress later
Stress testing and simulating different economic scenarios to assess the potential impact on the portfolio and to identify vulnerabilities is another way of evaluating the risk a portfolio may present, and banks may choose to implement various risk mitigation techniques, such as collateral, guarantees, or credit derivatives, to reduce the potential impact of losses and making sure they hold capital and reserves to absorb any potential losses.
By implementing these techniques, specialist credit risk groups can effectively manage the credit risk in their portfolio, which helps to ensure the stability and profitability of the financial institution.
Solveworx’s Credit Risk Management for Relationship & Portfolio Managers is aimed at both aspiring and new-to-role Relationship Managers and bankers & high-potential credit officers looking for the next career step toward managing their own portfolio of SME, Commercial or Corporate clients. The course is also suited to broader Credit Risk Management team members looking to rapidly refresh or acquire the skills and knowledge needed to effectively manage a portfolio of SME, Commercial or Corporate customers on behalf of a Bank or Regulated Lender.
The course is vital for anyone looking to understand, and how to properly structure and manage a portfolio of credit exposures essential to generating profits, designed for anyone looking practical knowledge and insights into the major families of Transactions that generate Credit Risk for Regulated Lenders, and banking ‘best practise’ in managing credit exposures and generating profits.
The Credit Risk Management course for Relationship & Portfolio Managers develops and enhances those Portfolio Management skills crucial to building and maintaining a high-performance Credit Management culture and profitable Lending Portfolio, with the inclusion of a ‘live’ simulation exercise. Business teams break into groups make key decisions, build out the credit story, and learn how to respond and react to ‘real-world’ challenges on the go in our live simulations. The live simulations are a great way to build team work.
To find out more about running this course for your team or business, contact Solveworx today
