Talk:Credit risk
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What is counterpary?
What do you think about the credit risk in new-ventures? Does the venture capital pay attention to this? and how they deal this problem?
This page really should discuss consumer credit risk, i.e. the risk involved in lending to reatil customers through products such as mortgages, unsecured personal loans, credit cards, overdrafts et al.
I wonder what you guys think of adding a section on how business credit risk is evaluated. For example, in my bank we think in terms of the 'two ways out': 1. Can the applicant demonstrate an ability to make payments? 2. If the applicant defaults, is there another way to get repaid?
- 1 is usually called "serviceability" or a servicing test, and looks to cashflow modelling, balance sheet ratios and considerations around management ability. It's like a consideration of "business as usual", or a reasonable expectation of what will happen in the future. And before you ask 'what does reasonable mean' or how we can have a 'reasonable expectation around the future', I literally mean just that. If we don't have an articulable reason, we cannot hold a belief.
- 2 is strictly about the saleable assets supporting the transaction, usually called "security". So if we were to realise their assets, how much of the loan are we likely to have paid down? Put another way, we're considering business failure. If the business fails, how much of our money can we get back? Often in commercial lending, there will be an unsecured component (i.e. we know we will get back less than 100%. The portion of shortfall is called the unsecured component).
Jason 08:15, 28 July 2007 (UTC)
- Good idea, go ahead - be bold!. In the contexts I use this in, the first is called various names, cash flow coverage, debt service coverage (ratio), sources of repayment, etc - all boiling down to likelihood of default (I think this is the term the credit ratings agencies use). The latter is usually loss given default or similar terms.--Gregalton 08:42, 28 July 2007 (UTC)
