CREDİT RİSK

Mahmut Civil
Cavit Can Atasoy
Mustafa Parlakçı
Content
I. INTRODUCTION
II. What is the Credit Risk?
III. Credit Assessment Methods
IV. Conclusion
Introduction
• Managing credit risk is a complex multidimensional problem and
as a result there are a number of different approaches in use,
some of which are quantitative while others involve qualitative
judgements.

• Whatever the method used, the key element is to understand

the behaviour and predict the likelihood of particular credits
defaulting on their obligations.
What is the credit risk?
• Credit risk can be defined as the potential that a contractual
party will fail to meet its obligations in accordance with the agreed
terms.

• Credit risk is also variously referred to as default risk,

performance risk or counterparty risk.
What is the credit risk?
• These all fundamentally refer to the same thing: the impact of
credit effects on a firm’s transactions. There are three
characteristics that define credit risk:
1. Exposure (to a party that may possibly default or suffer an adverse
change in its ability to perform).
2. The likelihood that this party will default on its obligations (the
default probability).
3. The recovery rate(that is,how much can be retrieved if a default
takes place).
Assessing Credit Risk
Assessing Credit Risk
• The credit risk decision facing a firm relates to :
1. The gain if no default happens
2. The potential loss from extending credit based on the
likelihood that default takes place and the amount that is lost if
default occurs.
• Extend credit: PV(Revenue – Costs)X(1-P) - PV(Cost)X P
• Default Risk: 0
Example
• For instance, if the company earns a margin of 20 per cent on
sales, then it will break even; that is, it will be indifferent towards
extending credit or refusing credit if:

• PV(Revenue-Cost) X (1-p) – PV(Cost) X p

• PV(20) X (1-p) - PV(100) X p
• 20-20p = 100p
• 20=120p
• P=0.167
Credit Assessment Methods
• Given the decision to be made, it is necessary to analyse the
credit in order to determine its quality.
• In the parlance of credit risk management, we would want to
determine the counterparty’s creditworthiness .
• In order to establish the status of the counterparty, credit
analysts will typically use a combination of financial or
accounting data and non-financial variables, as well as a
number of different models, or analytical tools.
Credit Assessment Methods
Conclusion
• Credit risk arises from changes in the financial solvency of firms
and individuals. An event of default occurs when the obligor fails
to perform under the terms of the contract.
• In this case, the lender or party with the credit is exposed to a
potential or actual loss. The degree of loss will depend on how
much can be recovered given the credit event or default.
Conclusion
• Credit risk assestment methods allows predicting and
forecasting and also measuring the potential risk factor in any
transaction.
• With these methods, We have certain amount of information
about risk. Thus, We try to make best decision with these
information.
• However, We can never reduce risk to zero.
Refrences
• Ken Brown,Peter Moles (2014). Credit Risk Management.
Edinburg Business School
• Edward I. Altman, Anthony Saunders(1998). Credit risk
measurement: Developments over the last 20 years.