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In: Finance

During our analysis of mortgages, we focused on two of the four risks associated with mortgages....

During our analysis of mortgages, we focused on two of the four risks associated with mortgages. We started by emphasizing Credit Risk and how the mortgage market aims to control for Credit Risk. Please discuss in details what the tools for controlling for Credit Risk are.

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Expert Solution

Tools for controlling for credit risk: There are many tools and principles that organisations follow to manage credit risk, some of these are stated below.

  • Establish a suitable credit risk environment: Here top managements are involved in assessing and approving credit risk management process and they provide appropriate guidelines to the others involved in this process.
  • Work under effective credit granting process: Here before granting credit to anybody banks and other financial institutions must define a well structure criteria and also they should have defined taget market so that it will be easier to make decisions whether to grant credit or not.
  • Maintain a good credit administration, measurement and monitoring process: Financila Institutions like Banks should have internal credit rating system and also they should have internal monitoring system. They should have sound information and analytical system to evaluate the credit risk management process.
  • Ensure sound control over credit risk management tools: Credit risk management tools should be independent and regular evaluation should be done to avoid any loss from the risk, these information regarding the evaluation of the credit risk should be communicated to the top management of the organisation so that they can take a sound decision about the management processes.
  • Credit Risk management platforms: There are many Credit Risk Management softwares available in the market which helps managing credit risk of financial institutions. These platforms are AI based thus they are able to capture large volumes of data and manage the risk effectively.

These softwares add information from the news of domestic as well as global countyries and gives signals to the lender if anything happens or the risk increases due to the release of the news on existing credits.

Hence, managing credit risk is very crucial and of greater importance, so involving senior management in the management process of credit risk is also very important.


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