Discussion – Managing Credit Risk
Inadequate risk management practices have produced consequences of epic proportions. The subprime meltdown in the late 2000s was primarily driven by insufficient management of credit risk.
Mortgage companies issued loans to individuals that lacked sufficient means to repay the loan and/or had poor credit. The global financial crisis brought corporate governance and corporate risk management to the focus of regulators who enacted more stringent guidelines.
For your discussion, think about the following:
How can organizations identify credit risk?
What is the significance of identifying and managing credit risk?
What are the implications of a failure to properly manage this risk?
First Post
In your opinion, which stakeholder is most adversely impacted by the above conditions? Employees, shareholders, debt holders, or society as a whole? Be sure to explain your answer using your thoughts on the above questions.
Reply Post
In your reply post, comment on someone else's risk selection. What other types of risk can you think of? Do you think the mitigation plan will succeed? Why?
Reply Post:
When it comes to risk management, organizations have many different tools they can utilize. Some ways that organizations can identify credit risks is by understanding the numbers, understanding non-financial risks, know the customer and their needs, have structure behind the arrangement, and continually monitor the relationship with the customer. When an organization can manage the above information, they are able to make more sound decisions and ensure that the customer and the company can be successful and that the loan or credit risk is manageable. I also believe that sound underwriting and pricing will help a company overall manage the risk; to ensure they are collecting adequate premium to help cover the risk.
By a company taking time to identify and manage the credit risk, it ensures that they can deliver on their contractual promise to the consumer. If a company is truly managing their credit risks, they should be able to foresee a trend and make changes when necessary to ensure that the company doesn’t suffer any major losses, especially ones that are avoidable.
The subprime meltdown in the late 2000’s is a great example of what can happen if an organization does not manage their credit risk properly. Organizations can eventually go bankrupt, they lose consumer trust, employees lose their jobs, and that can have a negative impact on the industry or society as a whole; especially when it comes to large, nationally known organizations. With that being said, I believe that society as a whole is impacted the most by credit risk decisions. The reason I believe this is because everything goes around in a circle; mismanaged risk not only effects an organization as whole (employees, shareholders), but it also effects the debt holders and the rest of society as they sit back and watch everything unravel. This should be enough to make any organization want to manage their credit and any other risk that they may have.