Role of Financial Statements in Decision Making

Topics: Risk management, Risk, Risk assessment Pages: 6 (1648 words) Published: May 1, 2011


This proposal study explores financial credit risk assessment. This is an important issue because there is currently no standardized method used by financial institutions for the assessment of credit risk. There are needs for a critical evaluation of the most popular credit risk assessment methods such as the judgmental method, credit-scoring and portfolio models along with limitations used. Survey interview process is needed for confirming that credit risk assessment methods should be combined for effective credit risk assessment. Accordingly, the study proposes a framework for improving credit risk assessment, which combines the strengths of these methods and copes successfully with study limitations.


Credit risk covers risks due to upgrading or downgrading a borrower's credit worthiness which depend on the potential sources of the risk who the client may be and who uses it as banks in particular are devoting a considerable amount of time and thoughts to defining and managing credit risk. There are two sources of uncertainty in credit risk: default by a party to a financial contract and a change in the present value of future cash flows that result from changes in financial market conditions as well as changes in the economic development. Credit risk considerations underlie capital adequacy requirements regulations that are required by financial institutions but financial borrowing as well as lending transactions are sensitive to credit risk, to protect themselves firms and individuals turn to rating agencies to obtain an assessment of the risks of bonds, stocks and financial papers they may acquire and after a careful reading of these ratings the investors, banks and financial institutions proceed to reduce these risks using risk management tools. Risk management is applied in finance. It is the process of identification, analysis and either acceptance or mitigation of uncertainity in investment decision-making. Financial economics deals with hedging problems in to order eliminate credit risks in a particular portfolio through a series of trades or contractual agreements reached to share and induce a reduction of risk by involved parties. Risk management should use financial instruments to negate the effects of risk by using better options, contracts and credit design plans so that such risks are brought to bearable financial costs as the tools cost money and requires a careful balancing of factors that affect credit card risks.

When a company grants credit to its customers it incurs the risk of non-payment as credit risk management refers to the systems, procedures and controls which a company has in place to ensure the different collection of consumer payments and minimize its risks. Credit risk assessment and management will form a key part of the company's overall risk management strategy as weak credit risk management is a primary cause of many business failures and that such small business have neither the resources nor the expertise to operate a sound credit risk management system.


Research Questions

Should people invest in a given stock whose returns are hardly predictable?

Should people buy an insurance contract in order to protect themselves from theft?

Should credit firms be rational and reach a decision on the basis of what they know and subjective assessment with the unfolding evidence?

What are the principles of rationality and bounded rationality?

How to control credit risks in a financial management? What are the proper risk management tools and techniques to apply?


To have a useful assessment of credit risk in a financial management

It is important to understand that no criterion is the objectively correct one to use as the choice is a matter of economic, individual and collective judgment imbued with psychological and behavioral...
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