Managing Credit Risk Process

Overview

• Model Credit Risk - Unfortunately, credit risk is not directly measurable, however, there are credit risk models that can create a ballpark picture of a firms credit risk profile.
• Set Credit Risk Limits - a firm must set credit risk limits, consistent with its strategic enterprise risk targets.
• Manage Current Credit Risk If a company exceeds it credit risk targets, it will have to actively manage the risk that it has
  • Trade the Portfolio
  • Use of Collateral
  • Position Netting - a common way to reduce credit exposure is the engage in position netting with counterparties. That is, the parties agree to pay each other whatever payments are owed, on a net basis, that is, the payments due are summed to determine the final payment. This reduces credit risk, because one party could default on a payment, and the other party could net that payment out of any payments owed back to the defaulter.