Credit Risk Management Essay Example | Topics and Well Written Essays - 2000 words

Credit Risk Management - Essay Example In other words, the bank has to incorporate technological processes in the identification of risk. Credit risk management must start from a particular point and this is determination of where the problem is. (Reserve bank of Vanuatu, 2007) No effective solution can be worked out if the bank does not understand the full magnitude of its problems. Additionally, banks that fail to understand the dynamics involved in counterparty risks are also likely to fail in managing that risk. Technology is also essential in the measurement of risk because through the latter, the bank can have standardised ways of dealing with it. Besides these, robust technology is also critical in the actual process of managing the risk. (Damiano and Massimo, 2006) The latter facts may seem quite basic to the bank, however, a word of caution is necessary when dealing with this issue. Because of forces of globalisation and the technology wave, many banks and financial instructions are merely rushing to the latest IT products without due consideration of their personal needs. This is the point at which these financial institutions go wrong; the most sophisticated form of IT can be worthless if it does not meet the needs of the bank. Consequently, there should be more emphasis on the process rather than the product in this regard. If all a bank needs is a simple IT tool to meet their needs, then they should opt for only what they need. In certain cases less is more; credit risk management ought to take precedence over other systems that are required to implement them. Numerous companies tend to operate from the wrong side thus making it increasingly difficult to proceed with one's choices. A research conducted by a certain investment bank (Lepus) about the importance of information technology in implementing effective credit risk management found out the following: Importance of technology in credit risk management 0% 5% 10% 15% 20% 25% 30% 35% 40% Just a tool Enhances efficiency and effectiveness Eradicates manual processes Promotes data transparency Smoothens Global credit risk Active management of portfolio Source: Lepus Investment Bank (2007): Effective risk management, available at http://www.sas.com/ accessed on 27th November As it can be seen above, the most important function among these bankers is the management and development of a bank's portfolio. Information technology is therefore a vital tool in effecting strategies for effective risk management. Aside from technology, a bank needs to have a comprehensive strategic policy for achievement of effective credit risk management. It should be noted that this forms the backbone of successful credit risk management. The principles and guidelines provide a background against which banks can operate in a sound environment. These policies serve as directional pointers to financial institutions because they are a set of rules that can be applied in a series of credit situations facing them. (Brigo and Pallavicini, 2007) The bank under study needs to put in mind the fact that those companies that have failed in their credit risk management endeavours have done so because of a lack of commitment to their policies and procedures. Having a set of rules that have been smartly laid out by a series of credit risk management experts is just one side of the story. The other side is