portfolio management (2)

once the likelihood of default is established ,It needs to be applied to probable loan amount outstanding at the time of default as the first stage of calculating the extent of the future loss associated with it. The balance outstanding at the time of default is difficult to predict with any accuracy , but it can probably be safely assumed that overdrafts will be in the upper range of their limits and most banks use the customer lending limuts as the basis for this calculation.
The final element in the calculation of the likely or expected loss on a loan is the extent to which loss can be mitigated by the realization of collateral security. Unsecured loans are likely to produce greater losses than secured ones when default has occurred . At the portfolio level ,the model has to factor in broad assessments of the realization value of different types of security based on general past experience. again , as with grading of the likelihood of default , a generalized assessment linked to portfolio performance is being made ,not aspecific individual credit assessment.
historically banks carried out credit risk analysis on an individual credit basis with little or no regard for the overall balance of assets in the portfolio . This produced big swings in provisions and profitability. portfolio management enables diversification of risks because concentrations of risk can be readily identified. A balanced portfolio needs to avoid lots of loans that will default together.