Page 86 - DMGT303_BANKING_AND_INSURANCE

Unit 4: Treasury Management & Banking Sector Reforms

1. Banks must manage the credit risk inherent in the entire portfolio as well as the risk in Notes
individual credits or transactions.

2. Banks should also consider the relationships between credit risk and other risks.
3. It should be considered as a critical component of a comprehensive approach to risk
management.
It is essential to the long-term success of any banking organisation.
The Basel Committee issued this document in order to encourage banking supervisors globally
to promote sound practices for managing credit risk (in lending business as well as in any other
business also).

Suggested sound practices are as follows:
1. Establishing an appropriate credit risk environment;
2. Operating under a sound credit-granting process;

3. Maintaining an appropriate credit administration, measurement and monitoring process;
and
4. 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
programme 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.
The Committee stipulates in Sections II through VI of the paper, principles for banking supervisory
authorities to apply in assessing bank's credit risk management systems. In addition, the appendix
provides an overview of credit problems commonly seen by supervisors.

4.12.2 Credit Risk Relating to the Process of Settling Financial
Transactions (Settlement Risk)

If one side of a transaction is settled but the other fails, a loss may be incurred that is equal to the
principal amount of the transaction.
If one party is simply late in settling, then the other party may incur a loss relating to missed
investment opportunities. Settlement risk (i.e. the risk that the completion or settlement of a
financial transaction will fail to take place as expected) thus includes elements of liquidity,
market, operational and reputational risk as well as credit risk.
Thus, the level of risk is determined by the particular arrangements for settlement. Factors in
such arrangements that have a bearing on credit risk include: the timing of the exchange of
value; payment/settlement finality; and the role of intermediaries and clearing houses.

Notes Narasimham Committee was appointed to examine the effectiveness of the existing
financial system of the country and suggest reforms.

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