Session: 71

Credit Risk

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Summary

Because of their operation nature, credit institutions are commonly expose to a diverse kinds of risks. Under this reality the institutions need to have the necessary solvency to afford their obligations while obtaining some interest from their capital. It has been notice, in this industry, that some common practices like the excessive concentration in some branches or activity sectors of the economy or the poor assignation of prices upon the acquired risks result in losses putting in risk the solvency of this ones in detriment of the general public.

A basic principle of risk management indicates that for more risk it is necessary to hold a bigger amount of resources to afford the high amount of losses that could happened. Mainly, in the regulatory circuit, it has been realised efforts to establish a direct relation between the institution's acquired risk and the regulatory resources necessary to guarantee the solvency of it. This regulatory practices have pass throw difficult periods, in which was observed some adverse events in both, the economic development of the country and some specific sectors of the economy. Such events, as well as the development of sophisticated methodologies of risk measurement on both, the national and international scope, have favour the evolution of a regulatory framework toward the creation of regulatory sources to afford extreme events. It is into this context that the next document is presented, in which the purpose is to collaborate with an application of the risk theory for the institutions credit losses measure. 

The present document objective is to build a theory framework that allows to show the difficulties which arrive from the bank institutions credit risk measure and how can they be solve with the use of several risk theory instruments. Particular emphasis is made on the problems that afford the institutions involved in a volatile environment. As a first reference it is pointed out the most basic models for the credit risk measure of a bank portfolio indicating at every moment the assumptions made and why they are restrictive.

The document proceeds to relax gradually each of the assumptions mention until a model close to the underdevelopment countries reality is reached. The document does not propose a way to reduce the uncertainty, since this is invariable from the bank's institution point of view. In contra-position, it's declare as an important result, the statement that, if well, the uncertainty is inevitable, the institution's amount of losses can be control by a careful portfolio design. Throw the application of the presented models to a credit portfolio related to the mortgage environment it is illustrated the capacity of the risk theory to model this problem and the policies derived for the use of this instruments in the bank environment.