General, Lending, Questions - Monday, November 21, 2011 23:54 - 0 Comments
Which Asset Poses The Greatest Credit Risk?
A Commercial loan to a large company or a loan to a local grocery or local retailer?
A loan to a local grocery/retailer would involve more credit risk. A small local retailer will more than likely only have company prepared financials and tax return. Company prepared financials can be less reliable for the obvious reason that the company prepares them with no review. Tax returns are typically vague when it comes to balance sheet. Local retailers that have only been in business for a few years don’t have much of a track record. They are still trying to lay down the foundation of the business and gain a strong customer base. Lending to a new local retailer town can be risky even though the business owner may have been successful while managing another retailer that successfully. On the other hand large companies typically have a history of success and have grown to their size through years of profitability. They also have audited financials, which have been checked by a CPA. Audited financials can be reviewed by analyst in more detail.
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Banking Terms - Nov 21, 2011 23:51 - 0 Comments
What is Credit Risk?
Credit risk (aka default risk) relates primarily to the quality of a banks assets. Assets of a bank have varying risk with loans having the highest default rates. Loan quality is based on risk grading scales (credit grades) that vary from bank to bank. The grading system measures the risk the borrower will default. A grade of one is safest loan and is typically cash secured loans. Loan grades are assigned upon origination and may be downgraded/upgraded during the life of the loan. Different types of loans possess different risk, ranging from essentially risk-free cash secured loans to unsecured loans with the highest risk.