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Benefits and detractors of credit risk

Inroduction

The objective of this research is to examine the control of credit risk threat in financial institutions. Credit risk control in financial institutions starts with the organization of sound lending principles and an efficient structure for handling threats (Jorion, 1997). Guidelines, industry-specific requirements and recommendations, together with risk focus boundaries are designed under the guidance of risk control committees and departments (Bluhm, Overbeck & Wagner, 2016).

Credit risk, also known as counterparty threat is the possibility of loss due to a debtor’s non-repayment of a loan or other history of credits (either the principal or interest (coupon) or even both). Also, credit risk threat is most simply defined as the potential that a financial loan client or counterparty won’t succeed to meet their responsibilities with respect to agreed terms.

In most financial institutions, financial loans are the biggest and most obvious source of credit rating threat. However, other sources of credit risk exist throughout other sections and products of a bank. They consist of actions in the financial and trading books, and those both on and off the balance sheet. Banks are progressively experiencing credit risk threat or counterparty threat in various financial instruments they offer other than financial loans. These consist of bankers’ acceptances, interbank dealings, trade financing, forex trading dealings, economical futures trading, trades, ties, stocks, options and the agreement of transactions.

Credit risk research (finance risk research, loan default rate analysis) and credit risk control are important to banks which provide economical loans to businesses and individuals. Credit risk can occur for various reasons: bank mortgages (or home loans), automobile purchase economical situation, credit card buys, installment purchases, and so on. Credit loans and trading facilities are situations that have the danger of leading to losses due to defaults. To know the danger level of credit users, credit providers normally collect large amount of information on debtors. Mathematical techniques can be used to analyze or determine threat stages involved in credits, economic situations, and economical loans, thus standard threat stages. While banks have faced prolems over the years for a multitude of factors, the major cause of serious banking problems continues to be proportional to lax credit standards for debtors and counterparties, poor portfolio threat control, lack of attention to changes in economic factors (interest prices, inflation prices, etc.)

In modern times, the flow of credit in global marketplaces has slowed from a glacial pace to a virtual standstill and credit marketplaces threaten to stay that way despite immense amounts of cash being pumped into various economies by their government authorities and central banks around the world. Credit risk is a problem faced by economical institutions all over the entire world and the question mostly asked is “what will it take for financial institutions to regain enough confidence in the economic climate to get credit score marketplaces moving again?”

Derivatives

Both policymakers and writers have placed significant fault for the Panic of 2008 – the international economic trouble that achieved full strength in that year – on over-the-counter (“OTC”) derivatives (Gerding, 2009). In turn, legal and policy reactions to the problems, such as the Dodd-Frank Act, have presented many new limitations on these particular economical equipments. Among other things, the Dodd-Frank Act prevents future government relief of certain organizations that trade in derivatives, requires the main cleaning of many derivatives, and allows government authorities to set new security specifications for types that are excused from those main cleaning specifications (Gerding, 2009).

Yet, a research of both the role of types in the economic problems and the new rules regulating derivatives, must avoid artwork with too wide concepts. Several misunderstandings endanger to mix up both the most serious threats resulting from derivatives and the regulating reaction. A certain varieties of derivatives – especially credit score types – cause particular concerns because of their ability to increase make use of throughout the economic system. Credit derivatives  are a form of mixture, whose value is based on the money risk of another firm or economical instrument (Omarova, 2009) . However, the full economic consequences of the higher make use of from credit score types are often themselves not fully fleshed out. Many commentators have focused on how improved make use of, whether arising from credit score types or otherwise, magnifies the frailty of banking organizations. To be sure, excessively utilized banking organizations represent an important concern.

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Moreover, by linking one standard bank to another, credit score derivatives can increase counterparty threat, or the threat of one party to economical transaction defaulting on its obligations. The web created by banking organizations entering into complex credit score derivatives with one another in series raises the specter of utilized organizations falling like dominoes (Huang & Huang, 2012). The potential incidents of failing banks and other economical firms represents one form of system threat. It was this scenario that apparently animated the extraordinary federal bailout of the insurance giant AIG, which had underwritten hundreds of billions of dollars in credit score derivatives that proved assures to other large banking organizations. The emerging failure of the firm left a myriad of other banking organizations with enormous exposure (Posner, 2009).

Yet this potential domino effect of counterparty risk is but one side of the coin of the consequences of credit score derivatives and their ability to lead to leverage. What the above research, however briefly summarized, fails to capture are the macroeconomic results of credit score derivatives. Writers need to aim to move beyond the research into the counterparty risk of derivatives to explore these macroeconomic results. By allowing banking organizations – those organizations that borrow to lend – to enhance make use of, credit score derivatives can operate to boost the overall amount of assets in markets. This increase in assets can be thought of as helping the overall supply of money in a market, which can have a number of significant economic effects (Posner, 2009). By improving leverage and assets, credit score derivatives can fuel rises in resource costs and even bubbles. Rising resource costs can then mask mistakes in pricing credit score derivatives and in assessing the risk of make use of in the economical state. Furthermore, the use of credit score derivatives by banking institutions can contribute to a cycle of leveraging and deleveraging in the economy.

Advantages of credit risk

Many types of credit rating threats exist, which sometimes are known as in specific terminology. Any improvement in costs associated with a client not paying as decided can be loosely classified as credit rating threat. For example, even if credit cards customer does end up not paying his bill, if the lender has to make selection calls or resort to a selection agency, this increment on price is a version of credit risk. More specifically, “default risk” is the danger that the celebration does not and cannot pay as decided (over and above a simple increment in selection cost) and is sometimes generally known as “counter-party threat.” When the client is a government, credit rating threat is often generally known as “sovereign threat.”

Companies, government authorities and all types of lenders take part in credit ranking research to determine to what level they face credit ranking risk associated with their investment strategies. In with a weight of the pros and cons for making a certain type of investment, firms utilize in-house applications to recommend on reducing and preventing threat (or shifting it elsewhere) or use third party help, like analyzing ranking agencies’ estimates of credit reliability from companies like Standard & Poor’s, Moody’s, Fitch Scores and others. After banks using their models and the advice of others to position customers according to the threat, they apply this knowledge to reduce credit ranking threat.

Creditors use a variety of means to lessen and control credit score threat. One way lenders decrease credit score threat is by using “risk-based pricing,” in which lenders charge higher rates to debtors with more perceived credit score threat. Another way is with “agreements,” whereby lenders apply stipulations to credit, such as debtors must periodically report on their finances, or such that debtors must repay the financing in full after certain events (like changes in the customer’s debt-to-equity ratio or other financial debt ratios). Another method is diversification, which can decrease credit score threat to lenders as well as a diversified client pool is less likely to standard simultaneously, leaving the creditor without hope of recovery. Besides these, many companies utilize credit score insurance or credit score derivatives, such as “credit standard swaps,” in an attempt to transfer threat to other companies.

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Conclusion

In this report we have been able to define credit risk that is faced by financial institutions. These are threats whereby the bank clients can either default in the financial obligations to the bank or the bank having to incur additional costs so as to recover from the client. Credit derivatives have also been looked at. Their effect on interest rates has also been expounded on. Credit risk has also its own advantages. Financial institutions that embrace it and put in place strict strategies to contain it will be prosperous.

References

Bluhm, C., Overbeck, L., & Wagner, C. (2016). Introduction to credit risk modeling. Crc Press.

Gerding, E. F. (2009). Deregulation pas de deux: Dual regulatory classes of financial institutions and the path to financial crisis in Sweden and the United States. NEXUS, 15, 135.

 

Huang, J. Z., & Huang, M. (2012). How much of the corporate-treasury yield spread is due to credit risk?. Review of Asset Pricing Studies, 2(2), 153-202.

 

Jorion, P. (1997). Value at risk (pp. 1-4). McGraw-Hill, New York

 

Omarova, S. T. (2009). The Quiet Metamorphosis: How Derivatives Changed the’Business of Banking’. University Miami Law Review, 63, 1041.

Posner, R. A. (2009). A failure of capitalism: The crisis of’08 and the descent into depression. Harvard University Press

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Performance Management system

Growth and development analysis of a human being

It has been written previously that one is born with their traits. Writers have also indicated that traits are passed from one generation to another. I however believe this to be untrue. There are those traits that one is born with and those that one learns as they grow up.

We cannot take for granted the interactions one has with other human beings and nature. This has a way of changing us. The way we think and believe is highly contributed by the people we interact with and our backgrounds. In this paper we will discuss how I grew up to procrastinate and also a perfectionist. I believe I grew into this.

I push myself and others to do a perfect task and at the same time do the hard tasks the last minute.

Procrastination is evading the performance of a job which needs to be achieved. It is doing the more enjoyable tasks first, or doing those tasks that are less urgent as a substitute to more vital ones. This means that one puts off the difficult tasks first. Everyone has been accused of procrastinating at one point or another. However, more than 20 % of the population is said to procrastinate frequently. Procrastination can be defined as their way of life.

Performance management his highly done, in line with the goals and objectives of the organisation while at the same time ensuring that the strengths and weaknesses of employees have been established.  Meeting business goals and objectives is the essential reason for there being any organisation.

For this to be achieved there needs to be periodical measurements of the progress towards achieving these goals and objectives. The goals and objectives of the organisation need to have been communicated to all employees so that the company can soldier on as one team.  After this communication has been done, the achievement of these objectives needs to be measured appraised and relevant actions taken from time to time. The performance management process is part of the entire business since its inception till the day that it closes business.

Procrastination is said to reflect our struggle with self-discipline and control. It also shows our inability to predict our feelings for the next day. To critic this statement and belief I would say that procrastinators are good at making choices and prefer lesser demanding tasks as compared to the difficult tasks. Critics can also be quoted saying that procrastinators claim that they achieve better results when under pressure. More often than not that’s the way procrastinators qualify tasks and then work towards achieving them.

Personally, I have in many occasions preferred to avoid negative emotions so as to delay stressful tasks. So as to achieve more with limited I prefer doing the difficult tasks under pressure. This has enabled me to save time over the years.

Psychologists have cited such abehavior as a way of dealing with anxiety that is associated with finishing a task. Anxiety can get you to start working on a task either early or late (Steel, 2010). The focus should therefore be more of impulsiveness. Anxiety can only cause you to late on a task if it is impulsive.

 

 

 

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References

Steel, P. (2010). The procrastination equation: How to stop putting things off and start getting stuff done. Random House Canada.

 

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Advantages of Debt

Debt and deficits

A deficit is a difference between income and expenditure where spending is higher than income. Once you have a deficit, it means you have to borrow to cover it. This situation leads to debt. Governments borrow by selling securities to the public.



I believe that there is good debt and bad debt. There are many journals on this topic. One writer says debt is not the problem and the next predicts that debt will ruin civilization (Hanson, 2006). Common sense is you spend what you have and save the rest. However, this is not normally the case all the time. Many people who do well with money have something in common: they know what they want (Gerber, 2012).  It all matters with why you have a deficit and opting for a debt. Good debt is one that is a sensible investment in your future. It will leave you better financially in the long run. Taking a student loan, investing in business, getting a mortgage or buying a car that will bring income is good debt. Purchasing a luxurious house, purchase an extra car or borrowing to meet day to day expenses is bad debt.

 

 

 

References

Gerber, L. (2012). Top 10 Tips for Developing Money Management Skills. The Rosen Publishing Group.

Hanson, J. (2006). Good Debt, Bad Debt: Knowing the Difference Can Save Your Financial Life. Jon Hanson.

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Accounting Information System

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A  credit union is developing a new AIS. The internal auditors suggest planning the systems development process in accordance with the SDLC concept. The following nine items are identified as major systems development activities that will have to be completed.

REQUIRED

  1. Arrange the nine items in the sequence in which they should logically occur.

 

  1. User specifications
  2. Technical specifications
  3. Systems survey
  4. Programming
  5. System test
  6. Post-implementation planning
  7. Implementation planning
  8. conversion
  9. User procedures and training

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  1. One major activity is to convert data files from the old system to the new one. List three types of file conversion documentation that would be of particular interest to an auditor. (CMA Examination, adapted)

 

  1. Parallel running
  2. Phased conversion
  3. Direct changeover

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Accounting Lessons Day 1 Experience

My first week in college was just a nightmare. It all started after admission to college. I had just completed my High School education and was on a high gear to keep the momentum of working hard in school.

Having performed well in High School, I knew accounting was my course since I always dreamed of being an accountant or an auditor since my lower grade classes. I was convinced that accounting was for focused and dedicated individuals from the examples of the bankers in our local town. And hence, I had to follow suit and pursue my dreams.

On my first day at school, I had a timetable for my first accounting class, Introduction to accounting, indicating the scheduled class was in AH 1 from 9 a.m- 11 a.m. By 8;30 a.m, I embarked on moving to the indicated venue to attend my first class. Upon arrival, I could see fresh faces of students, who looked new from their faces, books and uniform.

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I had to confirm from a few friends if I was in the right class, and there I was. After a couple of minutes, a tall, dark and slim man entered the class and greeted us. From the look of things, he appeared to be the tutor as he put his books on the teacher’s locker.

He welcomed us in a polite way, briefing us on some few tips of surviving in accounting classes and life around the campus. The tall man introduced himself as Mr. Jones, and was to take us through most of the units in accounting in the course of our study.

Mr. Jones appeared composed and even took us through some few tips of excelling in our accounting lessons. I was so much excited being in my dream class for my dream course. Abruptly, the teacher shouted, “Stop! Has anyone seen my car?” The whole class went silent since no one could comprehend what was going on and it was just our first class.

Mr. Jones perused through his books as he searched for something, though no one was sure what he was looking for. All of a sudden, he called the class off as he said he had forgotten his car at the restaurant, about twenty miles away.

There was a loud thunder as the class laughed at how our tutor had forgotten his car and had to rush back to collect it. We later learnt that Mr. Jones was mentally unstable and experienced such moments on many instances in the middle of his classes.

However, he was highly regarded by the rest of the school for his deep knowledge in accounting concepts and skills. That was how our first accounting class ended as the classed laughed off at Mr. Jones, our newest joke in campus.

 

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