Question

1. How does the mix of a credit portfolio impact on exposure and diversification?
   

2. Discuss the impact that individual transactions can have on a credit portfolio and explain how a financial institution can contribute to portfolio credit exposure.

Answer 1

CREDIT PORTFOLIO AND IMPACT ON EXPOSURE AND DIVERSIFICATION: ( Individual & Financial institution)

Credit portfolio is any collection of Credit exposure that is formed as part of Financial Intermediation activities regular lending product or derivatives in credit risk sensitive Risk. Portfolio analytics is the strategic process of segmenting customer base for review, analysis and action.

Credit risk management provide organisation with an opportunity to effectively drive operations process and drive profitable business results.

Credit portfolio model represent promising devices for enhanced supervisory oversight og banking organisation and allow for better internal risk management. To take advantage of the risk reducing benefits of diversifying loans in a large portfolio , a bank should manage its exposure on both the obligor and portfolio level.

Diversification is a technique that reduces risk by allocating investment among various Financial instruments, industries, and other to maximize return by investing in different areas that would each reach differently in event. Diversification is the most important component of reaching long range Financial Goals While maximizing risk.

Credit exposure portfolio is a measurement of the maximum potential loss to a lender if the borrower default on payment. It is a calculated risk to doing business as a bank. Bank seek to limit their Credit exposure by extending credit to customer with high credit ratings while avoiding client with lower credit ratings.

Bank use credit portfolio model for different purposes. The most prominent purpose is the calculate a Bank's economic capital. Economic capital is the amount of the capital that bank needs to secure its survival in worst case scenario.

Employing credit portfolio model, bank can obtain knowledge regarding the credit risk distribution of each element within their portfolio. This knowledge enables bank to identify the credit risk concentration within their portfolio. Credit portfolio model allow bank to detect diversification possibilities.