Compile information from all activities into a single document that addresses

This paper has to be on credit risks in commercial banks…it has to be 100% original work and well written but here is what it consists of.Compile information from all activities into a single document that addresses the following elements: The introductionBackgroundThe problemPurpose of the studySignificance of the problem or concernSupporting theoriesAnalysisProposed research methodology for implementing your problem solutionDefend your conclusion and provide recommendations for future scholarly researchSupport your paper with a minimum of five (5) scholarly resources in addition to the required readings. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included.Length: 10-12 pages not including title and reference pages, plus any appendices you deem necessary (spreadsheet, charts, other visual aids) Your paper should demonstrate thoughtful consideration of the ideas and concepts that are presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards where appropriateWeek 1: Build a literature ReviewCREDIT RISK IN COMMERCIAL BANKSMGT6010-8Northcentral UniversityAbdullah O. MustaphaDr. Elisa Fredericks0CREDIT RISK IN COMMERCIAL BANKSIntroductionBanking is a profession or practice which is rooted deeply back to the days ofrenaissance. It is believed that banking as a practice, sprouted from the very old stone-age banks.Then it evolved with time i.e. the Victorian age to the Google age banking in which everything istechnology driven. Banking now encompasses card system, ATMs and online banking.Credit risk has always been a center of great worry to bankers and the people in theindustry world. The main objective of this study is to understand better the procedure by whichbanks manage their credit risks. The first part of the study gives a backdrop of the work done, thenext part is a comprehensive review on credit risk management and banking and the last part ofthis study demonstrates a hypothesis testing.Hence, this will lead us to the conclusion that banks which are able to manage credit riskwell have a relatively high interest income and lower loan default rates. Commercial bank is aterm which is used to refer to a bank which primarily deals with loans and savings from largebusiness or corporation. It is a usual bank and not an investment bank.This term is popularly used to describe banks which lay stress mainly on corporations orbusiness. In some English talking countries even the term trading banks is used for commercialbanks. After the stock market crash during the depression, the U.S. congress passed an act whichstated that commercial banks will only focus on activities that are related to making loans andaccepting deposit. These banks raises funds by collecting deposit in the form of savings deposit,checkable deposit and term deposit from consumers and business. They also deal with buyinggovernment and corporate bonds.CREDIT RISK IN COMMERCIAL BANKSOriginThe work bank is derived from the Italian word “banco” which represents a desk used tomake transaction. Commercial banks extend credit to customers by taking deposits frominstitutional customers and individuals. They make profit by earning money in the form ofinterest from brokerages and borrower banks.A balance sheet for a commercial bank is different from that of a company. There are norecords of account received or payable instead under the liabilities there are deposits andborrowings and under assets there are investments and loans. A bank earns quite high interestrate on loans that it earns on the securities.If a bank has made bad loan to a business or consumer, then it takes a hit in the case whenloans aren’t repaid. Loans are in a way banks bread and butter. A bank can generate quite a largeamount of money from very few hard assets and loans are one of them. Cash accounts for only2% of assets for banks because the bank wants to gain profit, so it puts its money to work inorder to earn interest.Banks wants to earn profits, so they never put their assets into fixed income securities. Soit is always considered feasible to keep securities in hand for banks in case there is a need toliberate some liquidity. For a bank, its possessions are its meal ticket. So it is really important forinvestors to realize better how banks possessions are invested, how much liquidity is there in theform of security and how much risk is there in investment.CREDIT RISK IN COMMERCIAL BANKSThe investors should pay attention to matters such as the composition of assets, the assetgrowth, loans and securities and also the in the composition of the loan book. A major differencebetween banks and other units is the ratio between their high leverage i.e. the asset to debt ratio.Aims and ObjectivesThe main objective of the topic under study is to provide a clearer image of the fact thathow banks manage their credit risks. The areas under focus include evaluation of thephenomenon that how banks use their credit risk assessment and evaluation tools to reduce therisk of exposing to credit risks, finding facts that how and why the banking credit exposures areevolving in the present time.Focus is also on determining the relations between the perception, theories and models ofmanaging the credit menace and what practically goes on the banking world. The methodologiesand steps which are used in order to identify the mapping of the plan and defining frameworkand develop an investigation in order to mitigate risk. Determine the scope so that credit riskmanagement can increase the bank performance.Value at a RiskThis technique is used for the estimation of the probability of the portfolio and is basedon the statistical investigation of the past price volatilities and trends. This technique is mostlyused by companies, protection firms and banks that are involved in the deals of energy and someother merchandise.It is used to measure the risk when it happens. Some groups consider this technique as thenew science for managing risk. For bigger financial institutions, risk is more about losing moneyCREDIT RISK IN COMMERCIAL BANKSwhich has been given out in the form of loans and this technique is based on that common sensefact.VAR helps in estimating what is the worst case scenario in the situation and what can bethe biggest lose in the bad month. A VAR statistic has three major components- a confidencelevel, a time period and a loss amount or percentage. The situations that can be evaluated byVAR include some of the following: What is the largest amount that I can lose in the case of 95%or 99% of confidence limit on loan repayment in the succeeding month?What is the maximum loss that can happen in the case of 95% or 99% of confidence overthe next year? Hence VAR questions have the three elements that are the time period, high levelof confidence and an estimation of the loss on loan.Methods for Credit Risk ManagementSome of the traditional methods for credit risk management are as following:Portfolio ApproachSince the 1980s, many banks have effectively used the contemporary portfolio theory formanaging the market risk. Now-a-days several banks are using the value at danger and earning atrisk models to administer their market risk exposure and interest rates. The largest risk that isfaced by most of the banks is of credit and the practical of MPT has lagged in this respect. Bankshave realized that credit concentrations can in certain situations, adversely affect the financialperformance.CREDIT RISK IN COMMERCIAL BANKSTherefore a lot of institutions are following quantitative approaches for credit riskmanagement but the data problem is still an obstacle. The industry is making progress and isdeveloping new tools for measuring credit risk in the context of the portfolio approach. Creditderivatives tools are also being used in order to preserve customer relationship by transferringrisk effectively.The development of these two practices has immensely accelerated improvement in therespect of credit risk management in the portfolio perspective over the past many years.Asset by Asset ApproachTraditionally, banks have been following this approach for a long period of time. Thisapproach involves from time to time evaluating the credit exposures and credit superiority ofloan, thereby applying a credit risk rating and also uniting the outcome of these examinations inorder to identify a selection expected loss. The foundation of this system is an interior credit riskranking system and a sound loan evaluation.This helps management in evaluating and identifying changes in credit and portfoliotrends of an individual in a timely manner. Based on its result, the management system can makethe necessary changes in the strategies of portfolio and can add to the administration of credits ina periodic manner.ConclusionThe above study shows that there is an important association between the credit riskmanagement (in terms of loan performance) and the performance of a bank (in terms ofprofitability). Better bank performance is associated with better credit risk management.CREDIT RISK IN COMMERCIAL BANKSTherefore, it is essential for banks to practice prudent credit risk supervision and to protect theinvestor’s concern and also to defend the assets of the banks.The study shows that for a long period of time banks have been using diverse credit riskmanagement tools, methods and different evaluation models in order to supervise their creditrisks and that all of them have major one purpose which is to reduce the principal cause of bankfailure i.e. loan defaults.The study also proves that banks have higher interest income when they use a soundcredit management system or policies as they lower the loan default ratios. The study also provesthat banks can absorb credit losses when they have a higher profit potential and therefore theyare able to record better performance for a larger period of time.CREDIT RISK IN COMMERCIAL BANKSReferencesGambacorta, L., & Mistrulli, P. E. (2004). Does bank capital affect lending behavior? Journal ofFinancial intermediation, 13(4), 436-457.Harper, D. (2008). Introduction to value at risk VaR.Jiménez, G., Lopez, J. A., & Saurina, J. (2009). Empirical analysis of corporate creditlines. Review of Financial Studies, 22(12), 5069-5098.Khambata, D. (1996). The practice of multinational banking: macro-policy issues and keyinternational concepts. Greenwood Publishing Group.Kusy, M. I., & Ziemba, W. T. (1986). A bank asset and liability management model. OperationsResearch, 34(3), 356-376.Lee, T. S., Chiu, C. C., Lu, C. J., & Chen, I. F. (2002). Credit scoring using the hybrid neuraldiscriminant technique. Expert Systems with applications, 23(3), 245-254.Oguzsoy, C. B., & Gu, S. (1997). Bank asset and liability management underuncertainty. European Journal of Operational Research, 102(3), 575-600.Takang, F. A., & Ntui, C. T. (2008). Bank performance and credit risk management.