accounting in context
The Bank has to face with many risks in the business, like Interest rate risk, Foreign exchange risk, Credit risk, and Operation risk…Lending money is one of the main operations of each Bank. By mobilizing money as saving account, the Bank uses this money for individual customer, or business to borrow and make profit. But recently, with the inflation, the credit risk increases a lot which causes the bad debt in many countries, as well as the regression of world economy.
“Credit risk is the distribution of financial losses due to unexpected changes in the credit quality of counterparty in a financial agreement” (Morgan, 1997). According to the Karen A. Horcher, Credit risk will arise from default or failure loans which are expected to be paid, between the Bank and other individual or oganisations. There are many types of Credit risk, such as:
Default risk
Counterparty risk
Legal risk
Sovereign or country risk
Concentration risk
Besides the Default risk is defined as the traditional risk, the Counterparty risk is also one of the most commons risk in the Banking industry. It is usually a loan which will be paid in the future but the counterparty defaults before this time, and arises from 3 typical derivative instruments are Interest rate and currency swaps, Forwards, and Options.
The Counterparty risk is considered into 2 parts: Pre-settlement risk and Settlement risk.
Pre-settlement risk comes from the case of default of the counterparty or the financial intermediary responsible for the settlement, before the end of the contract with the Bank, so the loan cannot be paid. In this case, the Bank have to consider about the cost of new contract which is similar to the default but with other parties and may be lower profit. For example, if A makes contract about borrowing money from Bank but before the end of the contract, A goes bankrupt and contract settlement is impossible. So Bank will make loss with the loan of A is bad debt, and faces a cost when
“Credit risk is the distribution of financial losses due to unexpected changes in the credit quality of counterparty in a financial agreement” (Morgan, 1997). According to the Karen A. Horcher, Credit risk will arise from default or failure loans which are expected to be paid, between the Bank and other individual or oganisations. There are many types of Credit risk, such as:
Default risk
Counterparty risk
Legal risk
Sovereign or country risk
Concentration risk
Besides the Default risk is defined as the traditional risk, the Counterparty risk is also one of the most commons risk in the Banking industry. It is usually a loan which will be paid in the future but the counterparty defaults before this time, and arises from 3 typical derivative instruments are Interest rate and currency swaps, Forwards, and Options.
The Counterparty risk is considered into 2 parts: Pre-settlement risk and Settlement risk.
Pre-settlement risk comes from the case of default of the counterparty or the financial intermediary responsible for the settlement, before the end of the contract with the Bank, so the loan cannot be paid. In this case, the Bank have to consider about the cost of new contract which is similar to the default but with other parties and may be lower profit. For example, if A makes contract about borrowing money from Bank but before the end of the contract, A goes bankrupt and contract settlement is impossible. So Bank will make loss with the loan of A is bad debt, and faces a cost when