Bank Credit Risk Management

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Table of contents
List of figuresii
Executive Summaryiii
2Theory of bank credit risk management2
2.1Components of credit risk2
2.1.2Types of credit risk2
2.2Credit risk analysis and measurements3
2.2.1Expert systems3
2.2.2Risk Premium analysis4
2.2.3Multidiscriminant model4
2.2.4Hybrid system5
2.3Credit risk management8
2.3.1Limits Systems8
2.3.2Risk Quality and Ratings.9
2.3.3Credit Enhancement10
3Credit risk management adopted by ANZ bank10
3.1Industry concentration of credit risk10
3.2Impaired asset15
3.4Credit recovery21
4Conclusion and Recommendations27
Appendix 128

List of figures

Figure 1: Credit risk concentration by industry on average (2002-2006)13 Figure 2: Major industry concentration (2002-2006)14
Figure 3: Total impaired assets (on and off balance sheet)16 Figure 4: ANZ's impaired assets and provisions (2002-2006)16 Figure 5: Banks: Impaired assets17
Figure 6: ANZ's provision (2002-2006)18
Figure 7: Total specific provision as percentage of total impaired assets18 Figure 8: ANZ's total write-offs (2002-2006)19
Figure 9: Write-offs by real estate-mortgage sector and real estate-construction sector as the percentage of total write-offs by industries.20 Figure 10: ANZ’s total recoveries 2002-200622
Figure 11: ANZ relative values of recoveries 2002-200622
Figure 12: Special Purpose Entities’ assets 2002-200626

Executive Summary

The report aims at providing theoretical underpinnings relating to Bank’s credit risk management and examining the role of credit risk management in ANZ bank’s operation, critically analyze the measures having been taken by the bank to manage risk, using five-year data on ANZ banking group from 2002 to 2006.

Theory suggests that to properly analysis and measure credit risk, various tools can be used, including expert system, risk premium analysis, discriminant analysis and hybrid system with RAROC and VaR models. The report also provides the main techniques used to help a bank manages its credit risk, namely limits system, rating score and credit enhancement such as guarantees, covenant and securitization.

After examining the ANZ’s CRM, in general, the formulated CRM policy of ANZ and its used CRM measures have been adequate to maintain a sound credit risk management system over the researched period. This has been obviously evidenced by encouraging achievements in five main areas including industry concentration, impaired assets, write-offs, recoveries, and securitization. However, there are some gaps that need further improvements so as to better manage credit risk such as reducing its exposure to the real estate-mortgage sector, paying attention to the selling of non-performing loans to AMCs, carrying out further analysis on whether it should reduce its concentration on these two sectors and make an appropriate decision. In addition, ANZ bank should pay attention to assets that have great potential for securitizing like lease receivables, credit card receivables, housing loans, etc. and increase the value of assets being securitized. Introduction

1 Purpose

The purpose of this report is to apply the theories taught in class to examine the role of credit risk management in ANZ bank’s operation, critically analyze the measures having been taken by the bank to manage risk. The report is concluded with some recommendations on several aspects that ANZ bank should consider in improving its credit risk management.

2 Scope

The scope of this report covers five main areas: industry concentration, impaired assets, write-offs, credit recoveries, and securitization.

3 Methodology

The report takes...
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