Question

Why credit risk are important for bank received deficit and give out loans. How important credit risk to bank management and regulation ?

Answer 1

Credit risk is important for banks to assess the borrowers profile. It is the risk of default that the bank may suffer due to lending money. The risk may arise out of intentional or unintentional default. The banks may suffer a total loss or a partial one out of the sum lent. It is important for a bank management since the credit policies of the bank are designed on the basis of the credit risk of the borrower profiles. Also the bank monitors the money lent to the delinquency of the loans and takes measures to reduce the bad loans. Government regulators such as the Federal Bank monitor the bank's asset portfolio and if the banks are suffering high credit losses it may sound alarm for the economy and on the economic policies of the government.