Bank's credit risk is defined as the maximum expected loss, which can occur with a given probability over a period of time by reducing the value of the loan portfolio, due to partial or complete insolvency of the borrower at the time of repayment.

Bank's credit risk includes the risk of a particular borrower and portfolio risk.

Credit risk - the risk of non-payment by the borrower (issuer) of principal and interest owed to the lender (investor) within the terms of issue of the security term (bonds, deposits and savings certificates, bonds, government bonds, etc.), as well as preferred stock (in part of the fixed obligations to pay dividends). Source of credit risk under this definition is a separate, specific borrower.

Credit risk - this is likely to reduce the value of the assets of the bank, provided the sum of loans and purchased debt obligations, or that the actual return on this part of the assets will be much lower than the expected theoretical level. In this case, the source of credit risk is the loan portfolio as a collection of credit investments.

   Company "Franklin & Grant" to provide banking services to institutions calculating quantitative values as specific credit risk of the borrower, and the entire portfolio. A unique service is:

an integrated approach to risk management,

to use their own technology accurate calculation based on known techniques Value at Risk, Short Fall, etc.

in consideration of the specific requirements of each customer.

How to assess the credit risk of the bank's portfolio of loans based on the classification according to their quality?

It is necessary to conduct a risk assessment based on the probability of return of borrower credits. Constructed classification of borrowers on credit rating scale, which depends on the previous history of the borrower's repayment of loans received in the past, the present financial situation of the borrower and its financial obligations to other creditors.

Assessment of credit risk is based on the concept of VaR as a final measure of risk necessary for the calculation of capital. In the case of credit risk the real distribution of risk factors and changes in value of the portfolio, as a rule, are far from the normal distribution, which is taken into account in the technology of "Franklin & Grant." The methods of reconstructing the density distribution, various methods of simulation, for example, on the basis of Monte-Carlo. Thus calculates the set of possible scenarios of the credit rating for each borrower, which cover the rest of the period to repay the loan. Calculated value of the losses caused by the refusal of some borrowers from the loan. We calculate losses from the stock of outstanding loans and uncollected interest.

 After adding up all of the final results based empirical probability distribution of profits and losses on the basis of which is determined by the desired value of VaR.

The most important consideration when assessing credit risk is the construction of the transition matrix, which reflects the probability of transition from one category to the borrower's credit rating to another, higher or lower, within a certain time period. The probability of such a transition the borrower is calculated as the number of borrowers who change your credit score to the total number of borrowers.

How to assess the credit risk of an individual borrower?

With the Russian market at the borrower often not a recognized credit rating. Therefore, the lender needs to assess its credit rating on an objective scale credit rating. One of the methodologies that assessment is a method of estimating cash flows (cash flow) of the borrowing organization.

What if this is taken into account? Profit for the reporting period, with the percentage of positive periods considered over a loss. Gross value of production. Investment activities of the company. Financial activities and a number of other aspects.

Based on these statistics, the company has been able to calculate VaR technology credit risk associated with this organization. It is, in fact, the probability of delay or non-payment by the borrower or the loan interest throughout the loan amount.

How to assess the credit risk of the bond portfolio?

Due to the rapid growth of the corporate bond market risk management to changes in credit ratings of corporations is the most relevant aspect of banks, insurance companies and pension funds, which are traditionally the main investors in this market long-term securities. Change in the credit rating of the corporation issuing securities will change the value of the bond for a specified period, so institutional investors is necessary to calculate potential losses.

As a company, "Franklin & Grant" can help institutional investors assess the risks associated with the risk of change in the rating of the issuer of corporate bonds? The table published by the rating agency S & P, shows the probability of transition from one corporate credit rating to another.

On the basis of the probability distribution of the rating change corporations plotted probability threshold transition from one level of corporate credit rating to another.

The figure below shows the threshold of transition to other rating levels of the corporation, which is now assigned a credit rating of BB.

Further, the company "Franklin & Grant" is assessing the likely evolution of the portfolio of corporate bonds over a certain time interval, which provides a quantitative measure of the potential losses for the selected period, the customer.

In addition calculation methodology of "Franklin & Grant" takes into account the effects of correlation between single issuer credit rating and credit rating industry, as well as ratings of other issuers. This makes it possible to build asymmetric distribution, the strong shift in the area of loss, and thus simulate the processes of "chain of default" - the domino effect caused by the financial interdependence of issuers.

These are just some of the possibilities of credit risk assessment, the company uses "Franklin & Grant."

 Historically, the common practice is considering credit risk separately from other financial risks, and therefore the standards on bank capital adequacy, usually installed without any scientific basis. This practice leads to inefficient allocation of capital and inadequate management of banks relative to the management of the risks and the adoption of new ones. In this regard, the banks raises the question of the development of a unified system for risk assessment of aggregate portfolio, taking into account both market and credit risks.