Thursday, March 19, 2009

portfolio management (1)

The biggest change we have seen in credit risk management over recent years is in the use of portfolio management techniques . Traditional lending assessment looks at a loan and considers whether it will default or not. portfolio management seeks to understand the probability of default of a loan with certain characteristics . This enables a lending institution to build a a model of the overall risk in its portfolio of each new loan is given a grade based on its probability of defaulting . The measurement of this probability is based on a number of characteristics that are associated with default . The underlying grading model uses a set format to ensure consistency and comparability. There is a temptation to look at the grades generated as a 'quick fix' from of credit assessment but the number of characteristics considered in necessarily limited and model does not seek to identify which loans will default but is aimed primarily at establishing the risk of loss in the portfolio of loans . any grade of borrower can and will default and any grade of borrower can repay satisfactorily.

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