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Working Capital Management

Notes The Group Risk Committee (GRC), who’s voting members were drawn mainly from
GRM, was the most senior committee on policy and exposure approval for credit, country
and market risk. Despite the creation of the formal GRM organization, ABN viewed more
broadly as the responsibility of all departments in the bank. So risk was taken into account
from the inception of a transaction through to its completion.
Question
What is the process of credit risk management by ABN AMRO? Also discuss the risk
framework of the company.
Source: http://www.icmrindia.org

5.3.3 Principles for the Management of Credit Risk

While financial institutions have faced difficulties over the years for a multitude of reasons, the
major cause of serious banking problems continues to be directly related to lax credit standards
for borrowers and counterparties, poor portfolio risk management, or a lack of attention to
changes in economic or other circumstances that can lead to a deterioration in the credit standing
of a bank’s counterparties. This experience is common in both G-10 and non-G-10 countries. For
most banks, loans are the largest and most obvious source of credit risk; however, other sources
of credit risk exist throughout the activities of a bank, including in the banking book and in the
trading book, and both on and off the balance sheet.

Banks are increasingly facing credit risk (or counterparty risk) in various financial instruments
other than loans, including acceptances, interbank transactions, trade financing, foreign exchange
transactions, financial futures, swaps, bonds, equities, options, and in the extension of
commitments and guarantees, and the settlement of transactions. Since exposure to credit risk
continues to be the leading source of problems in banks worldwide, banks and their supervisors
should be able to draw useful lessons from past experiences. Banks should now have a keen
awareness of the need to identify, measure, monitor and control credit risk as well as to determine
that they hold adequate capital against these risks and that they are adequately compensated for
risks incurred.
The Basel Committee is issuing this document in order to encourage banking supervisors globally
to promote sound practices for managing credit risk. Although the principles contained in this
paper are most clearly applicable to the business of lending, they should be applied to all
activities where credit risk is present.
The sound practices set out in this document specifically address the following areas:
(i) establishing an appropriate credit risk environment; (ii) operating under a sound credit-
granting process; (iii) maintaining an appropriate credit administration, measurement and
monitoring process; and (iv) ensuring adequate controls over credit risk. Although specific
credit risk management practices may differ among banks depending upon the nature and
complexity of their credit activities, a comprehensive credit risk management program will
address these four areas.
These practices should also be applied in conjunction with sound practices related to the assessment
of asset quality, the adequacy of provisions and reserves, and the disclosure of credit risk, all of
which have been addressed in other recent Basel Committee documents. While the exact approach
chosen by individual supervisors will depend on a host of factors, including their on-site and
off-site supervisory techniques and the degree to which external auditors are also used in the
supervisory function, all members of the Basel Committee agree that the principles set out in
this paper should be used in evaluating a bank’s credit risk management system. Supervisory
expectations for the credit risk management approach used by individual banks should be

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