Question

28) A commercial bank must demonstrate abilities to manage its credit and interest rate risk to its shareholders and regulators. Describe fully two (2) ways banks can use to analyze and minimize each:

•  Credit Risk

•  Interest Rate Risk

Answer 1

Credit risk management  

Credit risk is that a borrower will not pay the loans back to bank. A bank can manage the same by the below mentioned ways'

A: Credit history checking and monitoring the account for next 6 months closely

B: The credit terms must be clearly conveyed to the client and inform him about his credit limit.

Interest rate risk manangement

Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly affects the values of fixed-income securities and investment including loan and their securities. This can be managed in below mentioned ways.

A: Loans on floating rate should be given rather than fixed rate. Even if fixed rate has to be given, should of shorter period of time.Interest rate swap between fixed and floating rate is also useful and comes under this category.

B: Manage investment port folio and issuance of short term bonds to cover current market risk.