Preparing for the Credit Downturn
AbstractNew York, NY, USA July 2, 2008
Since banks have become accustomed to a low default environment, they run the risk of not being adequately prepared for a downturn, despite having invested significantly in credit risk measurement techniques in recent years.
discusses what banks can do to prepare for the next credit downturn. It outlines some of the management structures that need to be in place and provides seven recommendations aimed at ensuring that levers for managing credit risk exposure are effective and appropriate.
A credit downturn also offers an upside, such as opportunities to acquire weaker competitors, expand distressed debt trading, and offer third party workout services. To seize these opportunities, a bank will have to have its own house in order and be in a position of relative strength.
The report is 16 pages and has three figures. A table of contents is available online.
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Table of ContentsNew York, NY, USA July 2, 2008
|Signs of a looming credit downturn||5|
|Risk measurement is necessary, but not sufficient||7|
|Effective credit portfolio management structure||8|
|Essential levers in a credit downturn||10|
|Develop a plan for tightening lending standards||10|
|Develop a plan for changing approval processes||10|
|Review and test the effectiveness of early warning systems||11|
|Recognise the limitations of economic capital and ask common-sense "what if" questions||11|
|Pursue opaque and hidden risks||12|
|Conduct a comprehensive balance sheet and risk transfer review||13|
|Ensure your workout department is prepared||13|