No risk, no reward, according to the old adage. Although this may be true, it does not mean you should simply throw all caution to the wind in life, especially when it comes to your financial institution’s bottom line. Credit risk is an important part of keeping your business in the black and staying ahead of the competition, according to finance and banking expert Grace Jackson suntrust.
What is Credit Risk?
When you look at credit risk, you are looking at how likely you are to experience loss because a borrower fails to make payments on a certain type of debt. The purpose of credit risk management is to mitigate your losses through understanding how adequate your financial institution’s loan loss reserves and capital are at any moment. This is a process that has remained challenging for banks and other types of financial institutions around the world.
Why Does Credit Risk Matter?
Credit risk management is essential because through it, you can meet established regulatory credit risk requirements. In addition, you can surpass the requirements and enhance your business through the use of credit risk models.
The financial crisis around the globe, which led to a credit crunch, has drawn increasing amounts of attention to the management of credit risk. Regulators are therefore demanding greater transparency to ensure that banking institutions truly known their customers and the credit risk associated with them. Many banks are zeroing in how to comply with these stricter regulatory requirements and absorb the greater capital costs associated with credit risk, but this short-sighted approach is not enough. Through improved credit risk management, you have the opportunity not only to meet established requirements but also to immensely improve your business’s overall performance and to secure that competitive advantage you have always sought to attain in today’s competitive business world.