DRIVERS

OF CREDIT
RISK

FORMS OF CREDIT RISK

DIRECT LENDING
GUARNTEES OR LETTERS OF CREDIT
TREASURY OPERATIONS
SECURITIES TRADING BUSINESS
CROSS BORDER EXPOSURE

DIRECT LENDING
Direct lending involves the transfer of funds from the
ultimate lender to the ultimate borrower, most often
through a third party.
In the case of direct lending, that funds will not be
repaid

GUARNTEES OR LETTERS OF CREDIT

Standby and commercial letters of credit represent
conditional obligations of the Corporation which guarantee
the performance of a customer to a third party.
In the case of guarantees or letters of credit, that funds will
not be forthcoming from the customer upon crystallization
of the liability under the contract

TREASURY OPERATIONS
In the case of treasury products, that the payment or series
of payments due from the counterparty under the
respective contracts is not forthcoming or ceases;

SECURITIES TRADING BUSINESS

Investments in debt securities (e.g. bonds, notes) issued by
emerging market governments or companies tend to entail
higher levels of risk than advanced market debt.
In the case of securities trading businesses, that settlement
will not be effected

CROSS BORDER EXPOSURE

Credit risk arising where an otherwise solvent and willing
debtor is unable to meet its obligations due to the
imposition of governmental or regulatory controls restricting
its ability either to obtain foreign exchange or to transfer
assets to nonresidents (a transfer risk event).
It includes all of our credit extended and OTC derivatives
exposure from one of our offices in one country to
counterparty in a different country.
In the case of cross-border exposure, that the availability
and free transfer of currency is restricted or ceases.

CREDIT RISK DRIVERS

We can distinguish three "risk drivers" (from the less to
the most important):
Risk as a function of operations;
Risk as a function of the bank commitment;
Risk as a function of guarantees;

1. Risk as a function of operation

2. Risk as a function of bank commitment

In the ordinary credit facilities, bank commitment is very
low. It means that a bank can call its money back at a
moments notice (usually at two days notice).
In long-term loans and mortgage loans the bank is highly
committed: it can call its money back only when the
borrower doesnt pay at least two or more installments.
Finally, we should remember that bank commitment and
duration has an effect not only on risk, but also on costs.
Banks should fulfil some ratios provided by Central Banks.
And long term (as well as risky) facilities absorb more
capital, which is the "limited resource" for banks.

3. Risk as a function of guarantees