ABSTRACT
This chapter talks about discussion of risk assessment and management and focuses on the techniques and management strategies that are used in many types of financial institutions such as commercial banks. It emphasizes how bankers assess their exposure to credit, interest rate and liquidity risk and explains how the 'Five Cs' such as capacity, character, capital, collateral, and conditions, of credit management can be used to assess default risk to describes how income gap analysis can be used to assess the effects of interest rate changes on bank income. Lenders charge higher interest rates to compensate for the increased default risk caused by the negative equity and borrowers believed that property values would keep increasing thereby wiping out the negative equity. The chapter explains the four main steps to effective credit or default risk assessment and management. It shows how various types of financial derivatives can be used to manage interest rate and risk without restructuring bank balance sheets.
