Bank’s credit risks: methods of evaluation and minimization.

Bank credit risk refers to the totality of risk incurred by a bank from all of the loans that it issues to various customers. The risk for banks in issuing loans is that the borrowers will not repay the amount that is owed in the time that is specified by the loan agreement. If enough customers default on their loans, a bank can find itself in a serious financial predicament. As such, individual banks manage bank credit risk by doing thorough credit checks of their prospective borrowers and by insuring themselves against loans of significant capital.

Many people view banks as reliable institutions that have the stability to issue loans in a prompt manner. There is no guarantee for banks, however, that these loans will be repaid. Since many of the loans offered by banks are unsecured, which means that there is no collateral offered by the borrower, banks receive little recompense when a borrower defaults on a loan. For that reason, a bank must manage bank credit risk to protect against the severe complications that can arise from multiple defaults.

Most banks have a specific department that specializes in the management of bank credit risk. The individuals in charge of this department must make sure that the bank's exposure on loans is never so significant that it would affect operations if a worst-case scenario of multiple defaults occurs. These managers must also be aware that loans are often very profitable for banks, which make money from interest payments, so they must be ready to assume some degree of acceptable risk as the price of doing business.

The best method of managing bank credit risk is to keep close tabs on the individuals or institutions to which a bank might be compelled to lend money. Credit ratings are one way to measure the reliability of borrowers. If a borrower has a particularly troublesome credit rating, a bank would likely pass on offering a loan to this individual, or it would only do so at terms that are extremely favorable to the bank.

Another method available to banks when attempting to lessen bank credit risk is insurance. This is a wise strategy when the bank issues a loan so large that it would cause serious problems if the borrower does not make repayment. If there is no way to secure such a loan with collateral, an insurance policy that covers the bank in case of default can help to mitigate the damage done if repayment is never made.

International banks: transactions and risks.

An international bank is a financial entity that offers financial services, such as payment accounts and lending opportunities, to foreign clients. These foreign clients can be individuals and companies, though every international bank has its own policies outlining with which they do business.

Individuals work with international banks for a number of reasons, including tax avoidance, probably the term you've heard the most in relation to offshore banking. Tax avoidance isn't necessarily illegal.

Currency Risk

Conducting business internationally forces companies to become familiar with the currency exchange rates. Companies choosing to operate business locations on foreign soil typically use foreign currency when purchasing materials and hiring workers at the local facility. Start-up capital may come from the company's domestic operations prior to the company exchanges it for foreign currency. If the U.S. dollar is stronger than the value of the foreign currency, it will require more foreign currency to equal the value in U.S. dollars. Conversely, if the U.S. dollar is weaker than the foreign currency, gaining an equal-value currency exchange will require more dollars. Exchange rates may affect profits made in a foreign country when companies transfer foreign currency to their U.S. headquarters.

Political Risk

U.S. companies might hesitate when conducting business internationally since foreign countries may be less stable politically and economically. Situations such as political unrest, military coups, dictatorships and anti-business groups can create difficult banking environments in foreign countries. These political issues can make forecasting difficult because U.S. companies tend to lack familiarity with violent political upheaval. Business-friendly countries might create unfavourable banking conditions or institute tougher banking regulations to restrict foreign companies from dominating their local business market.

Accounting Risk

U.S. companies are required to follow Generally Accepted Accounting Principle (GAAP) when recording and reporting financial information from business activities located outside the United States. Publicly held companies face close scrutiny by regulators because companies may use foreign business operations to hide profits or losses. While these abuses might improve a company's domestic financial statements, external audits will uncover these discrepancies and report the improprieties to outside stakeholders. International banks may also be required to disclose which U.S. companies use their banking and investing services. Foreign countries usually require the reporting of financial information according to international financial accounting standards. These requirements mean U.S. companies must convert their GAAP-prepared statements to international standards or keep a separate international accounting ledger for their foreign operations. Either situation creates a lengthy and expensive process for the company's accounting process.