Theoretical and Conceptual Framework
TIFFANY & Co.
Jacobo, Ianey B.
Maigue, Daphne Chloe Q.
Ortiz, Sherylyn Fenn F.
Solana, Hazel Dianne E.
Yu, Camille Simsim C.
THEORETICAL FRAMEWORK
Figure 1. Division of Credit Risk (Wiley, 2013)
Credit risk refers to the probability of the loss emanating from the credit extended as a result of the non-fulfilment of contractual obligations arising from unwillingness or inability of the counterparty or for any other reason. The study of credit risk can be divided into two. First is the single borrower credit risk also known as firm or obligor credit risk which can be traced from economic, industry or customer specific factors. Second is the portfolio credit risk which focuses on credit exposure on a group of borrowers. It plays a crucial role in determining the quantum of economic capital required, which is a function of expected credit loss. This division will further facilitate understanding and management of credit risk.
Figure 2. Major Causes of Credit Risk (Wiley, 2013)
Credit risk is caused by several factors which can categorically be divided into two, the systematic risk and unsystematic risk. Uncontrollable risk or systematic risk is the external forces that affect all businesses and households in the economic system. For example, socio-political risks such as military coup, newly approved government policies and programs, wars, terrorism, international isolation, economic risks such as increase bankruptcies, decline in stock markets due to lower corporate profits, recession, growing unemployment, and other exogenous risks which impact all in the playground or the economy as a whole. On the other hand, the controllable risk or unsystematic risk does not affect the whole economic entity or all businesses and households but rather is industry specific or firm specific.
Figure 3. Stages of Credit Risk Management in Financial Intermediaries (Wiley, 2013) Banks and other financial institutions, in order to achieve good credit
Jacobo, Ianey B.
Maigue, Daphne Chloe Q.
Ortiz, Sherylyn Fenn F.
Solana, Hazel Dianne E.
Yu, Camille Simsim C.
THEORETICAL FRAMEWORK
Figure 1. Division of Credit Risk (Wiley, 2013)
Credit risk refers to the probability of the loss emanating from the credit extended as a result of the non-fulfilment of contractual obligations arising from unwillingness or inability of the counterparty or for any other reason. The study of credit risk can be divided into two. First is the single borrower credit risk also known as firm or obligor credit risk which can be traced from economic, industry or customer specific factors. Second is the portfolio credit risk which focuses on credit exposure on a group of borrowers. It plays a crucial role in determining the quantum of economic capital required, which is a function of expected credit loss. This division will further facilitate understanding and management of credit risk.
Figure 2. Major Causes of Credit Risk (Wiley, 2013)
Credit risk is caused by several factors which can categorically be divided into two, the systematic risk and unsystematic risk. Uncontrollable risk or systematic risk is the external forces that affect all businesses and households in the economic system. For example, socio-political risks such as military coup, newly approved government policies and programs, wars, terrorism, international isolation, economic risks such as increase bankruptcies, decline in stock markets due to lower corporate profits, recession, growing unemployment, and other exogenous risks which impact all in the playground or the economy as a whole. On the other hand, the controllable risk or unsystematic risk does not affect the whole economic entity or all businesses and households but rather is industry specific or firm specific.
Figure 3. Stages of Credit Risk Management in Financial Intermediaries (Wiley, 2013) Banks and other financial institutions, in order to achieve good credit