For this assignment, you will write a minimum three-page paper (not including APA title or references pages). In this paper, please address the following:
- Discuss why credit risk management within the financial sector is so significant.
- Why do you think so many banks failed to properly manage risk prior to the financial collapse?
- What are the consequences of failures of credit risk management and who do they affect?
- What measures can banks employ to mitigate credit risks
Answer preview
First, financial institutions are obliged by industry regulations to perform credit risk management. To avoid another financial crisis, regulators developed stringent measures for financial institutions that aim at minimizing the occurrence of accumulation of unpaid debts. As a result, if financial institutions fail to perform reliable credit risk management, they will violate those measures, making them liable to predetermined penalties by the relevant authorities. Additionally, they may also be subject to external audits and are at risk of losing their waiver. Secondly, financial institutions including banks are in the business of lending and borrowing money to make profits. If they do not have proper credit risk management, they may end up making losses. The money they lend out to their customers is from the contributions made by shareholders who may desire to collect at any time; hence, it is in their best interest to offer credit to people who will pay back as soon as possible. The interest charged to the credit enables them to make a profit which fulfills their primary goal of getting into the business.
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