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Managing Credit Quality FICCI – IBA Banking Conference October 2005

Managing Credit Quality FICCI – IBA Banking Conference October 2005. Client Level. Internal risk ratings Institutional reinforcement and “corporate culture” demanding accurate ratings across the Bank globally

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Managing Credit Quality FICCI – IBA Banking Conference October 2005

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  1. Managing Credit Quality FICCI – IBA BankingConference October 2005

  2. Client Level • Internal risk ratings • Institutional reinforcement and “corporate culture” demanding accurate ratings across the Bank globally • Moving to non-judgemental ratings, but judgemental component will remain for corporates • Internal review (Credit Review) with implications and consequences • Use of benchmarks • Public debt ratings • KMV (market sensitive) • Comparable spread movement (bonds, CDS) • Separation of Marketing and Risk Management • Eliminates the “conflict of interest”, although not the tension • Essential for independent risk monitoring; accurate risk ratings and defined credit quality in every risk manager’s annual performance plan

  3. Pro-Active Monitoring/Approving • Renewals and new credit action process • Upgrade/downgrade triggers, including benchmarks, specifically laid out • Should a downgrade trigger be met, requires • Approval -- at same or worse rating • Relationship strategy review depending on rating involved • Documentation review depending on rating involved • Approval document includes stress testing (most likely scenario; PSBE; real downside scenario); compared to downgrade triggers • Interim financial review and risk-oriented call memo • Includes review of risk rating, benchmarks, triggers • Quarterly problem loan process • Formal quarterly reporting and review process that includes exposure forecast and relationship strategy approval

  4. Macro Level • Roll up risk ratings • By each rating in an industry to assess the weighted average rating. Consider industry outlook and benchmarks. Set industry exposure limits. • By each rating to assess the total portfolio weighted average rating. • Analyze migration and migration trend in aggregate and by industry • Senior Management plays an active role in quarterly problem loan reporting reviews and relationship strategy, especially for large and more problematic exposures where exposure strategies and action plans must be approved quarterly

  5. The Theme • In the banking game of musical chairs, we want to have a seat • Requires us to be nimble and early at accurately calling turning points in direction of risk • Leads to active portfolio management • Management of exposure levels • Use of secondary market • Hedging

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