Modern trends in the development of methods for measuring...

Current trends in the development of methods for measuring credit risk

Over the past decades, there has been an evolution in the technique of assessing credit risks. "With the advent and increasing availability of many new and powerful risk assessment tools, banks and other financial institutions are no longer considering the process of determining a credit rating solely as a means of satisfying legal requirements and simply passive control of credit risk." The constant influence of a number of factors, which will be discussed below, became the catalyst that provoked the development of new or serious modification of existing methods of measuring credit risk and convincing financial institutions and rating agencies that a correct assessment of these risks became more important than ever to determine the fair the price of credit resources, increasing the profitability of credit activities, reducing risks and creating additional value for shareholders.

What factors stimulated the development and wider use of tools for determining the level of risk? First of all, this is increased competition in domestic markets. Strengthening the role of non-banking organizations in financial markets has led to increased competition in the lending sector, pushing banks to take more effective decisions in the pricing of credit resources (the development of the so-called Risk-Adjusted Pricing, ie pricing with risk assessment) and a more in-depth risk analysis with a view to efficiently allocating capital.

As the next factor, we can call the unprecedented growth of new debt instruments and securities. Due to the favorable financial climate and the desire of investors to invest in companies in the early stages of their development, in recent years, an increasing number of high-risk companies rated "Non-Investment Grade" became an active participant in the credit market. This has led to the fact that at present a significant number of loan applications are submitted by young small companies engaged in high-risk business and having a short credit history or not having it as such. All this significantly complicated the work of banks and other financial institutions in the field of monitoring and monitoring of credit risks, stimulating the development of high-precision and efficient methods for their assessment. "

The weakening of state control in the banking sector and the strengthening of universalization of banks also leads to increased competition in the banking sector. Thus, increasing efficiency and adequate risk management becomes the key to the survival of banks in the face of increased globalization of global financial markets.

Securitization and trade in loans can also be identified as a factor that stimulates the development of credit risk assessment tools. Most banks have their own credit rating systems. However, quite often they are quite specific and incompatible with each other. This incompatibility of rating systems creates obstacles to the development of securitization. Despite the fact that the major rating agencies, such KaKStandard & amp; Poor's and Moody's, there are already quite effective procedures for assessing credit risk, nevertheless this is not enough for its full development. The fact is that these methods are developed, first of all, for large companies whose securities are freely quoted in financial markets, while the main sector of securitization development should be that sector of the financial market where small and medium-sized companies address. Although they are not recognized as valuation objects of rating agencies, nevertheless they are the main carriers of risk from the point of view of loan portfolios of the majority of banks.

Another impetus for the development of methods for analyzing credit risk is increasing volatility in global financial markets, forcing banks to more carefully and carefully approach these risks.

In addition to the above factors, a number of researchers also refer to the increase in the number of bankruptcies, the reduction in the value of real assets (and hence the depreciation of collateral as security for loans) and, finally, the impressive growth of off-balance instruments with their inherent high default risk. All these factors give a serious impetus to the development of new methods of analysis of credit risk and probability of default, which have more powerful predictive abilities. In addition, they force many participants of the financial market to reconsider their understanding of risk and concentrate their efforts not just on determining its level, but also on actively managing this risk, including making more adequate decisions in the field of credit pricing. At the same time, more and more attention is paid to the analysis of not only a single risk, but also joint risks in the scale of the loan portfolio as a whole.

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