The Credit Risk and the Available Solutions for Banks (Essay Sample)

Credit Risk
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Credit risk is the risk that banks are exposed to in the event of a borrower fails to meet any of their payment obligations. With the world transitioning in a complex being, the failure to meet an obligation exposes the bank to great operational failures that may result in bankruptcy. Loans are the greatest source of credit risks with banks offering loans in maximizing its wealth through the art of lending whereby the borrowers are subjected to interest on the borrowed funds. The failure to meet the payment obligations exposes the banks to the risks of making losses and also extending on to liquidity risks whereby the banks could fail to meet their financial obligation i.e. bankruptcy.
At its peak during the 2008/9 financial crisis, the credit crunch was as a result of the credit risks following the failure of the customers and counterparties failing to meet their payment obligation. The consequences of the crunch are evident from the failure of many banks during the crisis from their inability finance their regular operations CITATION Pet13 \l 1033 (Koslowski, 2013). The majority of the crisis arguments were based on the lack of stringent regulatory measures to safeguard the interests of the banking sector without considering their put into the crisis being. Banks thereafter started wooing the regulatory commissions on regulations whereas the regulators insisted on the banks transparency. For example, the Washington Mutual bank was put into receivership in 2008 following its lack of sufficient capital to finance its operations, a being that was majorly caused by high credit risk CITATION Pet13 \l 1033 (Koslowski, 2013).
Through Credit risk management, the banking regulatory commission mandates the banks to assess their customers extensively before issuing loans. On the assessment, the banks are ought to assess the credit risks that the customer poses on being lend money, a critical assessment that bases on a customer's credit history to ascertain their creditworthiness CITATION Wil13 \l 1033 (Wild, KenShaw, & Chiapetta, 2013). Effective credit management is essential for the stability and improvement of the bank’s financial performance in operating in the present competitive market. Moreover, with the banks embracing new approaches to managing credit risk, the regulatory commissions have posed strict measures to ensure possession of high capital base by banks to cushion against credit risks CITATION Pet13 \l 1033 (Koslowski, 2013).
There are multiple credit management mechanisms available for banks in managing their credit risk management practices. Economic changes have an enormous impact on the credit risk management, a being which banks should put more focus to ascertain how the transitions affect the credit standing of the borrowers or counterparts CITATION How12 \l 1033 (Howarth, 2012). The Banks should adopt an efficient credit administration, evaluation, measurement and monitoring practices to ensure the creation of an appropriate credit risk environment CITATION Jef15 \l 1033 (Madura, 2015). Through economic evaluations, the banks shall be able to assess the potential future transitions in economic conditions when assessing th...