Dedicated to the Young and Energetic Force of Bankers
Sign In/Sign Out

WELCOME

   ABM-Case Studies

   ABM-Recollected

   ABM-Last Minute

   BFM-Case Studies

   BFM-Recollected

   BFM-Last Minute

   Important Circulars

   Master Circulars

   Bank DA Rates

   Bank Holidays

   Life Ins Companies

   List of PSBs

   List of Private Banks

   List of Foreign Banks

 

CAIIB-ABM-MOD-B-Credit Risk Mitigates

Credit Risk Mitigates

It is a process through which credit Risk is reduced or transferred to counter party. CRM techniques are adopted at Transaction level as well as at Portfolio level as under:

At Transaction level:
• Obtaining Cash Collaterals
• Obtaining guarantees

At portfolio level
• Securitization
• Collateral Loan Obligations and Collateral Loan Notes
• Credit Derivatives

1. Securitization
It is process/transactions in which financial securities are issued against cash flow generated from pool of assets.
Cash flow arising from receipt of Interest and Principal of loans are used to pay interest and repayment of securities. SPV (Special Purpose Vehicle) is created for the said purpose. Originating bank transfers assets to SPV and it issues financial securities.

2. Collateral Loan Obligations (CLO) and Credit Linked Notes (CLN)
It is also a form of securitization. Through CLO, bank removes assets from Balance Sheet and issues tradable securities. They become free from Regulatory Capital.

CLO differs from CLN (Credit link notes in the following manner.
• CLO provide credit Exposure to diverse pool of credit where CLN relates to single credit.
• CLO result in transfer of ownership whereas CLN do not provide such transfer.
• CLO may enjoy higher credit rating than that of originating bank.

3. Credit Derivatives
It is managing risks without affecting portfolio size. Risk is transferred without transfer of assets from the Balance Sheet though OTC bilateral contract. These are Off Balance Sheet Financial Instruments. Credit Insurance and LC are similar to Credit derivatives. Under a Credit Derivative PB (Prospective buyer) enter into an agreement with PS (Prospective seller) for transfer of risks at notional value by making of Premium payments. In case of delinquencies, default, Foreclosure, prepayments, PS compensates PB for the losses. Settlement can be Physical or Cash. Under physical settlement, asset is transferred whereas under Cash settlement, only loss is compensated.

Credit Derivatives are generally OTC instruments. ISDA (International Swaps and Derivatives Association) has come out with documentation evidencing such transaction. Credit Derivatives are:
1. Credit Default Swaps
2. Total Return Swaps
3. Credit Linked Notes
4. Credit Spread Options


……………………………………………………………………………………………………………………………………………


WEBSITES

  Telegram FREE Study Material

  Facebook FREE Study Material

  YouTube Channel For Lectures

  Bank Promotion exams

  Only for Bankers

  RBI

  IIBF

  IRDA

  SEBI

  BCSBI

  CIBIL

  Banking and Insurance

  Ministry of Finance

  Excise & Customs

  Income Tax Department

  NSE

  BSE


       

Copyright @ 2019 : www.jaiibcaiibmocktest.com