A Complete Guide to Credit Derivatives: CDS, TRS, Credit Options, and CLNs
Credit derivatives have become one of the most significant innovations in modern financial markets. They allow institutions to transfer and manage credit risk without necessarily transferring the underlying asset. By doing so, they provide critical flexibility in risk management, investment strategies, and capital optimization. What is a Credit Derivative? A credit derivative is a financial…
Read article Credit Risk Models in India: From PD–LGD–EAD to RAROC and Risk-Based Pricing
Credit risk models quantify and manage the likelihood and impact of borrower default across individual exposures and portfolios. They inform underwriting, pricing, provisioning, capital allocation, portfolio steering, and performance measurement, making them a core pillar of modern bank risk governance and profitability. Credit risk models in India support underwriting, provisioning, capital computation, portfolio steering, and…
Read article Understanding Portfolio Credit Risk: Systematic, Unsystematic, Concentration, and Correlation Risks
Portfolio credit risk is the aggregate risk arising from a collection of credit exposures, driven by macroeconomic conditions, borrower-specific factors, exposure concentrations, and inter-linkages across obligors and sectors. This article explains the key risk drivers—systematic risk, unsystematic/idiosyncratic/diversifiable risk, concentration risk, and correlation risks—and frames how banks can measure and manage them in practice. Systematic risk…
Read article Understanding the Credit Rating System: A Key to Safer Banking
Credit rating has become an indispensable tool in modern finance, especially for banks that continuously assess risks in lending. It not only ensures that banks minimize their exposure to defaults but also helps investors and regulators make informed decisions. Let’s explore what credit rating is, why it matters, and how both internal and external rating…
Read article Analyzing Risk at Every Level: Business, Financial, Industry, and External Risk Factors
A robust credit assessment distinguishes between obligor/borrower risk, business (operating) risk, and financial risk, then evaluates how these risks interact across industry, entity, and portfolio levels. This integrated view helps align underwriting with risk appetite, price loans for risk, and anticipate early warning signals. Obligor/borrower risk Obligor risk refers to the borrower’s overall capacity and…
Balancing Goals with Risk and Reward: Strategy, Risk Appetite, and Loan Policy in Banking
Credit Risk Management (CRM) is the backbone of sound banking practices. It ensures that banks strike a balance between growth-oriented lending and prudent risk control. An effective framework combines strategy, financial goals, loan policies, due diligence, underwriting standards, and organizational discipline to safeguard both customer trust and shareholder value. Strategic Approach to Credit Risk Credit…
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