CREDIT RISK

possibility of losses associated with diminution of credit quality of

borrowers or counterparties

Payment history
Making late payments or defaulting your EMIs or dues (recently or
consistently) shows you are having trouble to pay your existing credit
obligations and will negatively affect your score.

High utilization of Credit Limit

While increased spending on your credit card will not necessarily affect your
score in a negative manner, an increase in the current balance of your credit
card indicates an increased repayment burden and may negatively affect
your score.

Higher percentage of credit cards or personal loans (also known as

unsecured loan)
Having a balanced mix between the secured loans (such as Auto, Home loan)
and unsecured loan (such as Personal loan, Credit Card) is likely to have a
more positive affect on your score.

Many new accounts opened recently

If you have recently been sanctioned multiple loans and credit cards, then lenders
will view your application with caution because this behavior indicates your debt
burden has increased increase, which will negatively impact your score

Sources of Liquidity Risk

The growth dynamics of the banks portfolio both in terms of existing

and new deals is the third major source of liquidity risk.

This involves alteration of existing deals that have otherwise

contractually bound cash flows and garnering of new deals.

Existing term deposits can be altered through early withdrawal options while term
loans face the possibility of alteration through prepayment

Credit and Interest rate risk

The default of a counter party lends further uncertainty to cash flows

and is another source of interest rate risk.

Interest rate movements can lead to dynamic changes in the portfolio

through interest rate sensitivity driven early withdrawals and
prepayments.

Credit and interest rate risks are also considered precursors to liquidity risk
problems

Inadequate Funding Capability

A bank might also experience liquidity risk owing to unavailability of liquid assets,
rating downgrades leading to shrinkage of sources of funds or insufficient back up
lines of funding, sources unconnected to the forward payment structure

Portfolio Characteristics

Some bank specific characteristics that can amplify liquidity risk are the presence of
a few large contract holders (depositors or borrowers), and portfolios concentrated
in a few sectors or clients

Systemic Failures

A systemic failure refers to a liquidity crisis that engulfs a large part of the banking
system. Ex. Subprime crisis

SOURCES OF INTEREST RATE RISK

Mismatched Re-pricing combined with interest rate changes

The chief source of interest rate risk for the banking book is the timing
difference in maturity of fixed rate assets and liabilities and in repricing of floating rate assets and liabilities

Basis Risk

interest rates on each asset/ liability type might be linked to different

indices causing them to change in an unsynchronized fashion

Embedded Options- uncertainty associated with the exercise of various

options given by banks

Yield Curve Risks- Non parallel shifts in the yield curve

Portfolio Composition- change in portfolio composition

Growth in Volumes- growth in asset/ liabilities also alters the size of the
target variable

Exposure is defined as the sensitivity of target variables of a bank to

unexpected changes in interest rates

The EXPOSURE MAP looks like this:

Target Variable = Exposure * Risk Factors

The steps in carrying out GAP analysis are:

Selection of a timeframe for analysis,

Construction of time buckets or bands within the time frame,

Apportioning assets and liabilities to the time band corresponding to

their maturity or re-pricing date,

Grouping the assets and liabilities in each band into homogeneous

groups,

Calculating the periodic and cumulative GAPs for each time band, and

Calculating the likely changes in the target variable