Introduction

The innovation in the credit markets has been significant, with a variety of new credit risk transfer instruments available for managing credit portfolios. Naturally such instruments are not without their implications and the ongoing crisis has certainly highlighted the intricacies as well as opaqueness of some such instruments, derivatives and structures. Over the last couple of decades and mostly during the last few years, the portfolios held by banks has changed fundamentally to include a wider range of counterparties, some less creditworthy than others, in order to obtain higher returns.

Key findings

• Organisation of credit risk – Respondents were asked to distinguish how the credit department fits into the current business model, whether the credit risk function is simply seen as a control function or perhaps more as a business facilitation unit. Both of the banks spoken to asserted that it is ultimately a combination of the two.
• Strategy – Next, the interviewed banks were asked about the extent to which they have integrated between their market and credit risk functions. As far as the integration between the two functions was concerned, there appeared to be a fundamental split between the European banks spoken to.
• Technology – The tools and platforms will vary by bank. Naturally there are some similarities however the technology applications will be determined by the size of the portfolio and organisation, number of counterparties, products traded, in house expertise, requirements and budgets.

Conclusion

Previous research that Lepus has conducted highlighted that in general, people were able to obtain loans, which in reality should not have been granted in the first place. Nevertheless, it was established during the interviews that this was not a significant issue, as there was always opportunity in the market to pass on the loan, even at one hundred cents to the dollar. However, it is of no surprise that this is no longer the case, far from it in fact. As the money and overall liquidity dried up, confidence subsided and spreads widened, better terms are being sought on the fewer deals and transactions that are being done.

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Tagged with: 2009, credit risk, Risk Research Report