Differences in Assessing and Managing Credit Risk in Investment Essay

Differences in Assessing and Managing Credit Risk in Investment Banking and mercantile Banking - Essay ExampleCredit run a risk represents the possibility of loss due to the in office of the obligor to fulfill the monetary value in the financial obligation (bond, note, lease, installment debt etc.). The quote risk is known by slightly disparate terms in investment funds and mercantile backings. Counterparty ascribe risk is important for investment banking mainly in trading operations and loan cite risk is crucial in commercial banking. Though both(prenominal) may be caused by the same reason, default, they are managed differently. Credit risk becomes a very dear issue if accompanied by poor banking operations. Proper systems and controls should be in place for effectively assessing and managing credit risks in both type of banking operations. Credit risk arises when a borrower of a loan fails to repay it (in commercial banking) or when an issuer of a security or a bond fail s to fulfill his financial obligation (a corporeal who issued a bond may go bankrupt) to the borrower . For assessment of credit risks in the financial results the investment banking firms (which is much complex compared to assessment in commercial banking) rely on the credit rating assigned to the issuer by the major credit rating companies. To arrive at the credit rating, the agencies carry out a question and an assessment of the account statements (income and expenditure, balance sheet), quality of the management, previous handicraft and financial track records, the potential line of reasoning and financial risks and the ability of the management to mitigate them effectively.... Proper systems and controls should be in place for effectively assessing and managing credit risks in both type of banking operations. Assessing Credit risk in Investment Banking and Commercial BankingCredit risk arises when a borrower of a loan fails to repay it (in commercial banking) or when an i ssuer of a security or a bond fails to fulfill his financial obligation (a corporate who issued a bond may go bankrupt) to the borrower (in investment banking). For assessment of credit risks in the financial products the investment banking firms (which is more(prenominal) complex compared to assessment in commercial banking) rely on the credit rating (considered as the representation of the financial strength of the issuer or the product that is issued to meet its financial obligations) assigned to the issuer by the major credit rating companies. To arrive at the credit rating, the agencies carry out a research and an assessment of the account statements (income and expenditure, balance sheet), quality of the management, previous business and financial track records, the potential business and financial risks and the ability of the management to mitigate them effectively. Based on the data collected and analysis of the same, the agencies issue a credit rating, which is a qualitati ve judgment of the ability of the issuer to meet his financial obligations. Standard & Poor, Moodys (US) and Fitch-IBCA (UK) are some of the leading and reputed credit rating agencies whose ratings carry more value in the financial market. The companies/products who exhibit least risk are given investment grades and with increase possibilities of risk, the rating is graded down to the ones with definite possibility for default are