1、 1 外文资料 Why credit risk occur? And how to deal with it? Adverse selection in loan markets occurs because bad credit risks(those most likely to default on their loans) are the ones who usually line up for loans ； in other words, those who are most likely to produce an adverse outcome are the most lik
2、ely to be selected. Borrowers with very risky investment projects have much to gain if their projects are successful； and so they are the most eager to obtain loans. Clearly ， however, they are the least desirable borrowers because of the greater possibility that they will be unable to pay back thei
3、r loans. Moral hazard exists in loan markers because borrowers may have incentives to engage in activities that are undesirable from the lenders point of view. In such situations, it is more likely that the lender will be subjected to the hazard of default. Once borrowers have obtained a loan, they
4、are more likely to invest in high-risk investment projects-projects that pay high returns to the borrowers if successful. The high risk, however, makes it less likely that they will be able to pay the loan back. To be profitable, financial institutions must overcome the adverse selection and moral h
5、azard problems that make loan defaults more likely. The attempts of financial institutions to solve these problems help explain a number of principles for managing credit risk: screening and monitoring, establishment of long-term customer relationships, loan commitments, collateral, compensating bal
6、ance requirement, and credit rationing. Screening and monitoring Asymmetric information is present in loan markets because lenders have less information about the investment opportunities and activities of borrowers than borrowers do. This situation leads to two information-producing activities by b
7、anks and other financial institutions, screening and monitoring. Indeed , Walter Wriston, a former head of Citicorp, the largest bank corporation in the United States, was often quoted as stating that the business of banking is the production of information. Screening . Adverse selection in loan mar
8、kets requires that lenders screen out the bad credit risks from the good ones so that loans are profitable to them. To accomplish effective screening, lenders must collect reliable information from prospective borrowers. Effective screening and information collection together form an important princ
9、iple of credit risk management. 2 Specialization in lending. One puzzling feature of bank lending is that a bank often specializes in lending to local firms or to firms in particular industries, such as energy. In one sense, this behavior seems surprising because it means that the bank is not divers
10、ifying its portfolio of loans and thus is exposing itself to more risk. But from another perspective such specialization makes perfect sense. The adverse selection problem requires that the bank screen out bad credit risks. It is easier for the bank to collect information about local firms and deter
11、mine their creditworthiness than to collect comparable information on firms that re far away. Similarly, by concentrating its lending on firms in specific industries, the bank becomes more knowledgeable about these industries and is therefore better able to predict which firms will be able to make t
12、imely payments on their debt. Monitoring and Enforcement of Restrictive Covenants. Once a loan has been made, the borrower has an incentive to engage in risky activities that make it less likely that the loan will be paid off. To reduce this moral hazard, financial institutions must adhere to the pr
13、inciple for managing credit risk that a lender should write provisions (restrictive covenants) into loan contracts that restrict borrowers from engaging in risky activities. By monitoring borrowers activities to see whether they are complying with the restrictive covenants and by enforcing the coven
14、ants if they are not, lenders can make sure that borrowers are not taking risks at their expense. The need for banks and other financial institutions to engage in screening and monitoring explains why they spend so much money on auditing and information-collecting activities. Long-term customer rela
15、tionships An additional way for banks and other financial institutions to obtain information about their borrowers is through long-term customer relationships, another important principle of credit risk management. If a prospective borrower has had a checking or savings account or other loans with a
16、 band over a long period of time, a loan officer can look at past activity on the accounts and learn quite a bit about the borrower. The balances in the checking and savings accounts tell the banker how liquid the potential borrower is and at what time of year the borrower has a strong need for cash
17、. A review of the checks the borrower has written reveals the borrowers suppliers. If the borrower has borrowed previously from the bank, the bank has record of the loan payments. Thus long-term customer relationships reduce the costs of information collection and make it easier to screen out bad cr
18、edit risks. 3 The need for monitoring by lenders adds to the importance of long-term customer relationships. If the borrower has borrowed from the bank before, the bank has already established procedures for monitoring that customer. Therefore, the costs of monitoring long-term customers are lower t
19、han those for new customers. Long-term relationships benefit the customers as well as the bank. A firm with a previous relationship will find it easier to obtain a loan at a low interest rte because the bank has an easier time determining if the prospective borrower is good credit risk and incurs fe
20、wer costs in monitoring the borrower. A long-term customer relationship has another advantage for the bank. No bank can think of every contingency when it writes a restrictive covenant into a loan contract； there will always be risky borrower activities that are not ruled out. However, what if a bor
21、rower wants to preserve a ling-term relationship with a bank because it will be easier to get future loans at low interest rates? The borrower then has the incentive to avoid risky activities that would upset the bank, even if restrictions on these risky activities are not specified in the loan cont
22、ract. Indeed, if a bank doesnt violating any restrictive covenants, it has some power to discourage the borrower from such activity: the bank can threaten not to let the borrower have new loans in the future. Long-term customer relationships therefore enable banks to deal with even unanticipated mor
23、al hazard contingencies. The advantages of establishing long-term customer relationships suggest that closer ties between corporations and banks might be beneficial to both. One way to create these ties is for banks to hold equity stakes in companies they lend to and for banks to have embers on the
24、boards of directors of these companies. Loan commitments Banks also create long-term relationships and gather information by issuing loan commitment to commercial customers. A loan commitments a banks commitment (for a specified future period of time) to provide a firm with loans up to a given a mou
25、nt at an interest rate that is tied to some market interest rate. The majority of commercial and industrial loans are made under the loan commitment arrangement. The advantage for the firm is that it has a source of credit when it needs it. The advantage for the bank is that the loan commitment promotes a long-term relationship, which in turn facilitates information collection. In addition, provisions in the loan commitment agreement require that the firm continually supply the bank with information about the firms income, asset and liability position, business activities,
