Credit Risk Measurement

Credit risk is a common buzz word in many of the financial institutions. Many of such financial institutions come across various problems over the years for a number of reasons.

And the prime reason for the serious banking problems is plainly linked with the negligent credit standards for the borrowers and counterparties, poor risk management and several such factors which lead to the weakening of the credit standing of a bank’s counterparties. This is a common situation in both the G10 countries and non-G10 countries.

The term credit risk is defined as the risk that a counter party to a transaction fails to execute agreeing to the terms and conditions of the contract and thus effecting claim holder to bear a loss. In simple words credit risk is the risk that a borrower will not be able to pay back its debts. The main intention of the credit risk management is to increase the bank’s risk adjusted rate of return. This is done by asserting credit risk revelation within the acceptable guidelines. Banks need to handle the permanent existing problem of credit risk in the portfolio and even in the risks involved in individual credits or transactions. Banks should even manage the risks that are related to the credit risks and other risks. The effective administration of the credit risk is a crucial element in extensive approach to the risk management. This is also an effective means for the long-term success of the bank.

The huge and the most palpable source of the credit risk in many of the banking systems are loans. However many other sources of this risk originate through the activities of bank including in the bank booking and in the trading book. This list also includes acceptances, interbank transactions, trade financing, foreign exchange transactions, financial futures, swaps, equities, options, and settlements of transactions. As this credit risk is an alarming problem in banks world-wide, so the banks and their supervisors should be in a position to get all the required lessons from the past experiences. Banks should also be able to determine measure, monitor and control credit risk and perhaps be in a state to hold adequate capital against these risks and be able to compensate the risks that would occur. A committee named Basel committee has issued a document in regard to encourage the supervisors around the globe to practice the solutions for the risks.

There are several areas in which the practices of the credit risk in the Basel committees document. The various fields include establishing an appropriate credit risk environment, operating under a sound credit-granting process, maintaining an appropriate credit administration; measurement and monitoring process, and ensuring adequate controls over credit risks. It is not that necessarily all banks follow these solutions as it depends on the nature and complexity of the bank’s credit activities. All the members in the Basel committee should agree to the principles that are laid down to resolve and evaluate the bank’s credit risk management system. Thus this approach differs for various banks. 

With the rise of many manufacturers in several industries, such as clothing, computers, cars, etc., one needs to look at where he stands as far as competition is concerned. This gives rise, too, to the importance of a competitors analysis scorecard. What needs to be done here is to see the strengths and weaknesses of industry opponents and then make wise decisions from the results of this analysis. One will then be able to see if the current processes of his business are in line with the standards of the industry. This does not only include technological advances and applications, but also other business aspects, such as marketing, advertising, employee motivation, product quality, finance management, and many more.

In conducting this analysis, one does not have to measure everything. What is important is only to analyze key success indicators in the industry. Moreover, the goal here is to compare how the competitors stand against your business so you can get a clearer picture of what is going on and what actions to undertake. Remember that the action plans you will carry out should carry out the SMART objective. SMART is an acronym for specific, measurable, attainable, realistic, and time-bound. The action plans should have all these characteristics to rise above competition or otherwise, it is bound to fail.

First, there has to be a competitors array. This is a data table that compares your company to your competitors. As mentioned earlier, this should only contain key success indicators in your industry. For example, take a look at the quality of your product and the competitors’. Measure the quality of the competitors’ products and yours, too. Once the raw data is there, convert the score to a corresponding weight value depending on the metric’s impact on the business. Do this for the other metrics and then get the weighted average. You will then see the areas that your competitors are good at where you are not. Your goal is to improve these areas and maintain the others where you rise above them. Always remember that when you are measuring, always be objective. Keep the measurement based on facts, and not on assumptions and speculations.

Next, you have to conduct competitor profiling. This is where you gather as much information about your competitors and use these data to your advantage. You can formulate strategies to find out how you can advance on sales and other key success indicators. First, you can check on your competitors’ background. Check their location, marketing presence, online strategies, if any, and other activities that keep their business going. You may also want to check the top personalities in their firm and find out their financial stability. Check out the company’s history, important dates, and important activities. If you know that they will have a celebration, like an anniversary on this date, you may want to come up with your own special promotions on the same day, too.

These are the things that a competitors analysis scorecard should have. The information or data need not be too extensive. In fact, they should be precise, concise, and readily understood. Remember, you do not want to get stuck with analysis paralysis.
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Everybody is aware of the buzzword regarding businesses nowadays. This is called business intelligence and this is the part of the business in which the men behind its wheels use critical thinking and analysis to take the business to a higher financial level. Everybody knows that there is competition everywhere and that technology has made it easier for people to gather information. What used to be information that can only be acquired in school is now easily accessed all over the Internet. Knowledge has become pretty accessible and this has led to a lot of emerging companies and competition—solely because information is free. Since this is regarded as a threat by many people, there has to be a certain business intelligence scorecard in place to allow business leaders to know how they are doing in terms of decisions and technology.

Many businessmen were able to manage their businesses without any formal schooling. Only experience and practical logic taught them how to manage the different aspects of their trade. However, this is more of a trial and error method that people cannot simply afford to commit nowadays. Making an error will make customers go away if the issue is service. Making a mistake in decisions can be very critical in losing sales or leading employees. Now that there are proven approaches to business solutions, one simply has to use them as deemed fit.

The essence of business intelligence is pretty much about business management. Almost everything—from logistics to process to data analysis—is about managing the business well. Business intelligence is not at all about spying on enemies or competitors—although at some point, it becomes necessary—but it is about deriving facts from valid sources. And from these facts, decisions should be made.

One important thing that any business scorecard should have is the dashboard. A dashboard is a tool that corporate management or executives use to manage information. This are designed to make it easy for managers to see the data they need in managing things, such as sales, employee retention, customer retention, etc. These numbers are critical in making decisions because numbers do not lie. The biggest mistake that a leader can do is base decisions on assumptions or hearsay. Every step undertaken should be based on factual figures that will show if the endeavor is going to earn revenue or not.

Another thing that a business scorecard should contain is accuracy of data. If the numbers are wrong, the decisions are also likely to be wrong. This is an important aspect of the scorecard and accuracy can be obtained by automation of tools. There is a lot of potential for human error if things are calculated manually.

And lastly, it is important for every business intelligence scorecard to measure business intelligence tools. This should show if the tools currently in place—including the processes—are up to date with what the current technology has to offer. Without keeping up to the ever changing and dynamic motions of technology, one will be left behind in the business rat race to corporate success.

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Business is always entailed with risks. Not only because there is economic inflation, but also because there is almost no certainty in terms of sales. As everyone knows, there is a lot of competition in business, and one of the key strategies is to apply business intelligence metrics as part of the overall business management approach. Business intelligence is not something like spying on competitors. It is a discipline that was founded in 1958.

Business intelligence is nothing more than analytics. People who run businesses should use numbers based on facts to be able to make good decisions. These decisions are actually what will take the business to the next level or advance in its field. Without numbers backing up a decision, everything will be based on assumption instead of objectivity. As such, there is a need to know through metrics if the business solutions and intelligence applied really fits the company. Otherwise, if the very method that is supposed to bring wise decisions is wrong, the entire business can collapse.

Other than analytics, business intelligence is also about technology. Many businesses seem to have been left behind because of poor technological applications. Every business has to keep up with the times. Services become faster with technology and this is a critical issue, especially with competitors around. All of these are translated into numerical data and from these data; the leader of the business can make a decision that is synonymous to success.

However, what data does one need? What metrics need to be measured to find out if the business intelligence approach of one company is right?

First off, there has to be an established baseline. A baseline is a calculation of numerical averages based on certain periods of time. In many Business Process-Outsourcing companies that take customer service calls, Forecasting Data is considered a baseline. People who are in the forecasting department know how many customers will calls (not precisely, but very close to it) based on historical data. Baseline is also a term used in determining the Process Capability of any business process. A process is an activity where inputs are converted into outputs for the end user or the customer. Without a baseline, the metrics of the business intelligence will not have a solid foundation.

The next metric is the business dashboard. This is a file that shows all important numerical figures to the leader—or even to the end users—that will make it easier for them to analyze data. This is as critical and important as the baseline. Just like in a car, a business dashboard is a report or a user interface system that will facilitate faster information dissemination and analysis. Many of this information may not come from the same source, but these numbers or figures will certainly help the user achieve what is desired.

There are many more business intelligence metrics that any company may use other than the ones mentioned earlier. Some may not actually be applicable for all since industries are different in several ways. However, the two mentioned are probably the most important of all.

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When we say acquisition in the corporate world, it means that a larger company buys off a smaller company. The acquisition can be of two ways, a friendly one, or a hostile one. When we say that it is a friendly acquisition, the two companies are mutually helping each other and have decided to grow together as a single business unit resulting in a merge. When we say it is a hostile acquisition, it means the takeover is forcibly made and that the buying company (that is, the larger company) has purposes that could range from monopolizing the market to attempts of building an empire. What happens here is that the money taken from the buying company will be divided appropriately among the shareholders of the bought company and the smaller company ceases to exist. Either way, acquisition metrics are needed in the process.

Since hostility is a possibility in acquisitions, a perfect way to protect the target company, or the company that is going be bought, is to set up certain agreements before the acquisition. This gives the management of the target company peace of mind from having to be taken over by a larger company.

First, the target company could communicate with the buying company. They can talk about goals, the current assets and liabilities of their respective companies, and other relevant things before any suspicious move is done by the buying company. And then from there, they can at least determine what the reasons are of the buying company for deciding to acquire them. Should they find hints of a takeover, then at least they can prepare themselves this early to defend their company against the larger one.

Another way is by checking the historical background. Check if there are conspicuous relations between some of the members of the management of each company. Maybe there are some hidden grudges that could spring well back into your high school years or the like. This may be farfetched, but it never hurts to investigate.

Also, the uncertainty of an acquisition can hamper current business transactions. And when this happens, you can only turn to your employees and ask why the sudden decline in performance. Well, here is your answer. In an ordinary employee’s point of view, a possible acquisition could end up with him being jobless if things do not go well. Having this in mind, the employee will eventually lose zest towards his/her work and probably find a new and more stable job. Having all these into consideration, therefore it is also important to give the employees assurance that upon acquisition, their tenure in the company is not jeopardized.

In formulating acquisition metrics to ensure a merge, and not a hostile takeover, the employees, the company itself, and the relations from both the past and present between the two engaging companies should be the main factors to consider. Remember, transactions like these are serious and one unplanned move can cause detrimental damages. Being cautious is the main lesson to remember here.

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Every line of business should have an organized way of bookkeeping. This is the only way to determine clearly if the business is earning or not. Bookkeeping has evolved into something of higher technology, and yet, the essence is the same. The spreadsheets contain the assets and liabilities and expenses of the company and this will also show any assets that are liquidated. Debits and credits are there as well. In essence, there may have been changes and yet the principles are still intact. What technology made easier is for the calculation of these numbers. There is no more need to manually compute things so the margin for error is lesser. As in every company, one has to know the basics of accounting and measure its effectiveness through checking the process against an accounting scorecard.

The first thing that the scorecard should contain is the revenue of the company. Definitely, this is the net income of the company once all necessary costs have been subtracted. These costs include capital for raw materials, salaries of employees, non-productive hours, and other non-tangible items that the company needs to pay for. A simple glance at these numbers will show a business leader whether the revenue is satisfactory or if there is a potential area of improvement and cut costs.

Another thing that needs measurement in the scorecard is the yield. A sad fact of reality is that several mangers look at sales, and yet, they do not look at what could have been made if the wastes and defective products are controlled. For example, if a single cloth can make two shirts, the ideal ratio or yield should be 1:2. However, some are only able to produce one shirt out of this cloth due to human errors. These are the processes that need to change so the number of defects can be reduced. Once this is addressed, a significant change will be very visible in terms of yield.

Next, the scorecard should show information on product costs. This figure will show managers if the company is within the recommended expenditures and if the sales are actually converting into income once raw materials are converted into output. If a product is not likely to sell, and this is only adding weight to the company’s expenses and not on the income from profit, this product may need revamping or may even need to be totally eradicated.

Of course, budget should always be present in any given scorecard that has something to do with accounting. This gives managers a high-level picture as to whether the company is overspending on overhead expenses or if the company is not spending enough on its processes to come up with quality products and services.

Ideally, an accounting scorecard should not be very complex. It should be easy to understand so there is not much analysis that needs to be done. The scorecard is something that was designed to tell executives of what is going on at a simple glance. Keeping it simple is better.
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It is inevitable for all businesses to have a systemized way of keeping track of your financial records, or bookkeeping, so to speak. Bookkeeping is something that businesses should never be without because this is an organized method of keeping track of finances, to determine whether the business is indeed earning. For decades now, companies have used accounting sheets for efficient bookkeeping. However, the advent of technology has paved the way for accounting to become techie, so to speak, as well. Still, no matter how techie a company’s accounting system may be, it would still be important to keep track of this very system’s progress, to check if it is indeed aligned with corporate goals and objectives. One way to do this is to employ accounting KPI or accounting key performance indicators. This way, there would be smaller room for marginal errors here.

If you are not too sure about which KPIs to include here, well, do not fret altogether. Technology may have changed certain aspects about the method, especially when it comes to calculation of figures. However, the underlying concept remains the same. Thus, you might find the KPIs used here to be quite familiar. And one of these is revenue.

In fact, the revenue of the company itself is one of the first things that you should include as KPI. In its most basic form, revenue can be defined as the company’s net income once overhead expenses and costs are subtracted. Although overhead expenses and costs can differ from one company to another, these would typically include the capital used by companies for raw materials, the salaries of the workforce, the number of non-productive hours, and the many non-tangible items that any business has to pay for. By including this in your list of KPI for accounting, all managers have to do is look at these figures, and revenue is easily determined. Managers can also check for areas that need improvement.

Another KPI that you can include is yield. It is actually a common mistake amongst managers to look at merely sales figures. They do not really take the time to look at the measures that could have been undertaken to control waste and defects. For instance, let us say that it takes a web content editor two hours to edit ten articles. This is already the fastest that the editor can go at, to ensure quality assurance for the articles produced. However, because a computer virus was able to penetrate the computer network, the editor’s PC is also affected. The network has to be shut down, to eradicate the virus before it spreads to other PCs. Consequently, it took the editor five hours edit just ten articles. This could have been avoided with the simple installation of antivirus software. Making significant changes, therefore, will ensure more yield for the company.

Budget, as always, should be one of the accounting KPI as well. With this on your scorecard, you can easily determine if the company is spending within the budgetary constraints, or if it is already overspending. Thresholds have to be determined here as well. In the scenario mentioned above, it is ideal to get the best brand of antivirus software in the market today. However, it would be more practical to just go with a not too famous brand that still offers the same features that the best brand offers. This is just one of the ways that a company can avoid overspending.
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Metrics, scorecards, and key performance indicators are widely used by business organizations to help them see how far they have gone in terms of implementation of plans and achievement of goals. In the same manner, an accounting company scorecard is a beneficial tool that accounting firms can use to help them function more efficiently.

Accounting is a very important aspect in any business operation. It involves the measurement and provision of accurate financial information to managers, investors, tax authorities, and other stakeholders to help them make decisions about how they should allocate the resources of a company, organization, or public agency. Due to the nature of the accounting function, accounting firms provide critical support to their clientele. Among the most common financial services accounting firms offer are estate planning, accounting, taxation and investment, and retirement planning. Because what they offer are professional services, it is imperative for accounting firms to identify all factors and issues that would significantly impact their profitability and their reputation. Moreover, to increase their efficiency, management of accounting firms should always be ahead of everyone else when it comes to innovating and updating their knowledge and technology. In addition, there is a need for these companies to invest on their employees or workforce, as these people hold the key towards building lasting relationships with clients.

At present, accountants continue to do the traditional functions that are delegated to them. However, it is widely noted that there has been a tremendous change in the role that they play. Aside from recording and updating financial records and documents, they are now usually included when managers of business organizations formulate long-term plans. In short, they now become organizational strategic partners. Because of this new position that they play as members of a management team, there is an added pressure for them to foster improvement in all aspects of their operations. The Balanced Scorecard is a management system that would prove to be very useful for them. Developed by Robert Kaplan and David Norton, this scorecard approach will help accounting firms assess their performance using not only financial measures but also non-financial metrics. In fact, this performance measurement system advocates that there should be a balance between strategies implemented and four perspectives of business operation namely; financial, customer, business processes, and learning and growth.

Metrics that are commonly categorized under the financial perspective include return on capital, economic value of assets, and operating income. Common examples of customer perspective metrics, meanwhile, include customer satisfaction, market share, and customer retention. Business process perspective metrics also include cost and quality of procurement, production, and fulfillment of orders. Lastly, metrics for learning and growth perspective may include employee retention and employee satisfaction.

While the metrics previously mentioned may not exactly be the metrics that accounting firms find most relevant, they give the idea that the Balanced Scorecard approach is a more effective performance evaluation system. After carefully deliberating and identifying key indicators of success in their organizations, they can integrate all these metrics as they develop an accounting company scorecard.

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It is the risk that a counter party to a transaction will fail to perform according to the terms and the conditions of the contract, thus causing the holder of the claim to suffer a loss. This main reason for the risks is because of the poor understanding of the financial transactions that occur between the customer and the banker.

One of the tools to reduce the risks is through calculating the APY (Annual percentage yield). It is a tool for evaluating how much a deposit earns you, and it is a standardized way of comparing investments.  Your job as a consumer is to put your money where it will get the highest APY. APY , amount you earn on a deposit over an year. It refers to your earnings how much money you are making on the investment that you have made. Because we all want our money to work for us and grow, it is important to get a good Annual percentage yield through the bank. APY is notable because it takes compounding into account., Compounding means making earnings on your earnings.

This means that the quoted APY is telling how much you are really making on the money. In general, you will find that the Annual percentage yield is higher for more frequent compounding periods. Ask your financial institution how often they compound. If your money is compounded daily as opposed to quarterly, you’ll be able to earn a better APY. Don’t think of one compounded daily investment as separate from your checking account – they all go together and should be considered one. Think of yourself as the Chief Financial Officer of You. To make up your personal Annual percentage yield, find ways to make sure that your money is compounding as frequently as possible. If two compound daily investments pay the same interest rate, pick the one that pays out interest monthly instead of at maturity. Then, you can reinvest your interest payments and start earning interest on that payment. Even we can increase our investments by calculating the Annual planning yield and by making proper planning where we have to invest your money, which can yield us much more profit.

Calculating an investment’s APY can be tricky. If you want to just find out what an APY is with Excel, here’s the function:

=POWER((1+(A1/B1)),B1)-1 where A1 is the Rate and B1 is compounding frequency.

Try pasting this formula into any cell on a spreadsheet (except A1 or B1). In cell A1 you will put the stated annual interest rate – in decimal format. For example, if the stated annual rate is 6%, you’ll type “.06” in cell A1. Then, you put the number of times you’ll compound each year. For example, for daily compounding you would enter “365” (or 360 depending on the institution) in cell B1. In the example I’ve used, you’ll find that the Annual percentage yield is 6.183%. In other words, if you get 6% annually with daily compounding, your APY = 6.183. Try changing the compounding frequency and you’ll get an idea of how the APY changes.

For example, you might show quarterly compounding (4 times per year) or the unfortunate 1 payment per year (which just results in a 6% APY). Thus this is an efficient way of cutting short the problem of credit risk.

A credit is something that an organization or individual makes a sum available for you to borrow. There are two main types of credit. Home loans, or mortgages, and personal or shop loans are linked to a specific item or items – for example, a new kitchen, or a house.

Revolving credit on payment cards can give you access to a fixed amount of money that you can spend as you wish, in a wide range of retailers and other outlets. In finance, Credit risk management is the process of assessing risk in an investment. When the risk has been assessed, investment decisions can be made and the risk vs. return balance considered from a better position. The main way to reducing credit risk is by monitoring the behavior of clients who wish to apply for credit in the business. These clients may be businesses, individuals or sovereigns. Credit Risk is further divided into many areas in a somewhat hierarchical fashion.

Whereas the credit risk is the possibility that a bond issue will default by failing to repay principal and interest in a timely manner. Bonds issued by the federal government, for the most part, are immune from default (if the government needs money it can just print more). Bonds issued by corporations are more likely to be defaulted on, since companies often go bankrupt. Municipalities occasionally default as well, although it is much less common.

Credit risk management is a concept where Rocket scientists, financial engineers and mathematicians have revolutionized the management of credit risk. New analytical techniques to measure, manage and control credit risk are being developed and tested at a rapid pace. An enormous input of science has been injected into an area - risk assessment - that has often, in the past, been regarded as more of an art.

The collapse of Barings, Britain’s oldest merchant bank, and the billion-dollar losses suffered by Sumitomo Corporation catapulted the need for sound risk control into corporate consciousness which named as the credit risk control. But even before these spectacular losses, risk control had occupied the minds of those whose business it is to know - the regulators and the senior managers of the world’s leading financial institutions. They knew that sound internal risk control is essential to the prudent operation of a financial institution and to promoting stability of the financial system as a whole.

Some Aspects Regarding Banking Risk Management includes the financial and banking market is presently right in the middle of a developing and consolidating process. The banks are those institutions which can guarantee the financing for economic projects, generally speaking and particularly for the investment projects. The credit market got developed and secures financial sources for the entrepreneurs. But each and every credit is implying a less known aspect, as it is the subject of running a number of risks. The credit risk does exist; therefore, what really matters for both contracting parties is to properly evaluate it and learn about it in advance. The text below is emphasizing a number of aspects concerning the management of the credit risk (i.e. the non-payment risk, the exposure risk, the recovery risk).