Credit Risk

Credit risk is the risk of loss due to counterparty not fulfilling their obligations or where the risk of borrowers not paying debts 
Credit risk may occur when the loan is given, or bonds purchased by the bank unpaid. Credit risk can also arise because of non-performance of other parties, such as a failure of payment of a derivatives contract. 
For most banks, credit risk is the risk that they face. While the margin is relatively small compared to loans that were distributed, so that losses due to credit can quickly spend bank capital. 

Methods that can be done by the Bank to manage the Credit Risk / Credit Risk Mitigation 
a.Grading models 
b.Loan portfolio management 
c.Sekuritisasi 
d.Collateral 
e.Cash flow monitoring 
f.Recovery management 

a. Grading Models 

With the grading model, banks can perform the test against the risk, allowing banks determine the likelihood of a result of the ugly / bad outcome (referred to as the probability of default - PD). Bank can ensure that their loan portfolio is not concentrated on the ugly credit (poor quality loans) with the possibility of a default rate. 
Pemeringkat agencies such as Moody's, S & P using the grading model to calculate the credit risk of a bond. 
In practice, grading model to consider other factors, such as% of debtors that are used to pay interest on loans, job history and old loan borrowers compared to the age of borrowers. 
Basel II specifically emphasized the grading model as part of the credit risk framework. 

b. Loan Portfolio Management 

Avoid the concentration of the industry / geographic region specific. 
Portfolio loans terdiversifikasi well mean that the risk of a default is also lower. 
Analysis of the portfolio is called the 'cohort analysis' and can be applied to a loan corporation or individual. 

c. Sekuritisasi 

Other steps that can be done to guard from the 'shock economy' is a mem-'package 'portfolios and to sell some loans to investors sekuritisasi → 
Sekuritisasi allows banks to reduce lending big prosentasenya in the credit portfolio and the high-risk loans. The bank funds can invest in assets that have assumed a lower risk. 

d. Collateral 

Collateral is defined as assets by the debtor diagunkan to guarantee loans and can be confiscated when going TORT. 
The Bank must ensure that the collateral can minimize risk at the time of going TORT. The Bank must ensure that the value of collateral stand still (not down) when going TORT. 
Type of collateral in Basel I was very limited. 
Type of collateral in the Basel II more knowledgeable, especially on the approach to the Internal Ratings-Based (IRB) for credit risk. 

e. Cash flow monitoring 

Bank can reduce credit risk by: 
Limit the level eksposure → Exposure at default - EAD 
Ensure that customers react quickly to changing circumstances. 

f. Recovery Management 

Many realize that the management of bank bad debts that can efficiently reduce the losses that occur due to the bank so formed a special division to handle bad debts. 
Loss Given Default (LGD) is the estimated amount of the loss is capable of dipikul by the bank as a result of a default. LGD and the establishment of management plays an important role in the IRB approach to calculate credit risk capital. LGD value in the IRB approach is directly influenced by the bank estimates about how much recovery can be done in bad debts.