How does the mix of a credit p
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How does the mix of a credit portfolio impact on exposure anddiversification?
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Discuss the impact that individual transactions can have on acredit portfolio and explain how a financial institution cancontribute to portfolio credit exposure.
Answer:
CREDIT PORTFOLIO AND IMPACT ON EXPOSURE ANDDIVERSIFICATION: ( Individual & Financialinstitution)
Credit portfolio is any collection of Credit exposure that isformed as part of Financial Intermediation activities regularlending product or derivatives in credit risk sensitive Risk.Portfolio analytics is the strategic process of segmenting customerbase for review, analysis and action.
Credit risk management provide organisation with an opportunityto effectively drive operations process and drive profitablebusiness results.
Credit portfolio model represent promising devices for enhancedsupervisory oversight og banking organisation and allow for betterinternal risk management. To take advantage of the risk reducingbenefits of diversifying loans in a large portfolio , a bank shouldmanage its exposure on both the obligor and portfolio level.
Diversification is a technique that reduces risk by allocatinginvestment among various Financial instruments, industries, andother to maximize return by investing in different areas that wouldeach reach differently in event. Diversification is the mostimportant component of reaching long range Financial Goals Whilemaximizing risk.
Credit exposure portfolio is a measurement of the maximumpotential loss to a lender if the borrower default on payment. Itis a calculated risk to doing business as a bank. Bank seek tolimit their Credit exposure by extending credit to customer withhigh credit ratings while avoiding client with lower creditratings.
Bank use credit portfolio model for different purposes. The mostprominent purpose is the calculate a Bank’s economic capital.Economic capital is the amount of the capital that bank needs tosecure its survival in worst case scenario.
Employing credit portfolio model, bank can obtain knowledgeregarding the credit risk distribution of each element within theirportfolio. This knowledge enables bank to identify the credit riskconcentration within their portfolio. Credit portfolio model allowbank to detect diversification possibilities.
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