The price charged for a credit must cover the banks administrative and refinancing expenses. Most important, the margin must reflect the risk that is associated with each particular credit. The various factors influencing the pricing decisions are as follows:
If the above-mentioned risks materialise they can have serious consequences on a credit institution alone but also on the whole banking system.
Market risks The main function of banks on the markets (financial, currencies, derivatives, etc.) is to intervene on behalf of their customers: so the risk remains risk one customer.
Definition This one is the most dangerous and common risk a bank has to face; this happens every time a customer does not respect his financial commitments with the bank; most of the time, this is the reimbursement of a loan.
Definition This risk comes from the variation of foreign exchange rates and appears when a bank has assets and debts in foreign currencies. Depending on the variation, the situation of the bank will be as follows.
Definition This kind of risk is the core of the banking business which consists in granting a loan from collected funds. The interest rate risk anises when the cost of the resources is higher than the interest obtained from the loans.
Different kinds of risks Just like any company, credit institutions have to face many constraints; because of their type of activity and their economic role, three main constraints can influence their strategy.
Increasingly, environmental issues have to be taken into consideration when a bank tries to assess a business. This is not due to fashionable trends, but a number of hard facts forcing banks to have a close look at the environmental implications of businesses, their products and their markets.
The operations of a company can be understood as a cycle: every company invests cash to buy raw materials. It adds value in the manufacturing process to convert raw materials into finished goods.
1. The balance sheet When a credit analyst has to make a credit decision, the first thing he or she will have to analyse is a firm’s balance sheet. The balance sheet analysis alone may often not be sufficient to assess a firm’s creditworthiness, and other factors have to be taken into consideration.
