What is credit risk in banking and what does a credit risk professional do?

Credit risk in banking is the potential that a bank borrower fails to repay a loan, breaches their lending covenants or fails to meet other contractual obligations. While loans are the largest and most obvious source of credit risk for banks, they are increasingly facing credit risk from other sources (e.g. interbank transactions and trade financing). Banks need to balance credit risk in their lending portfolio with sufficiency in their capital and loan loss reserves and Credit risk management is the discipline of ensuring that the credit risk exposure of the insititution is within acceptable parameters.

Credit risk professionals are responsible for ensuring that banks understand and manage the credit risk they are taking, including those associated with new activities and products. They provide insight into credit performance and use modelling techniques to help to build and optimise credit strategies. In addition, they perform activities to assist in the management of the bank’s lending portfolio, including supporting the underwriting process, monthly reporting, and the review of the credit procedures and controls.

Key responsibilities

  • Developing and maintaining the company’s credit risk strategy and related policy
  • Implementing and monitoring the credit risk control framework (e.g. early warning indicators, risk appetite)
  • Developing or overseeing the development of mathematical and statistical models for forecasting credit risks in a variety of situations
  • Ensuring that all credit risk exposures at client, product and portfolio level remain appropriate and within acceptable parameters
  • Monitoring and communicating the level of credit risk taken to senior management
  • Helping to improve the stress testing framework
  • Undertaking key tasks in credit risk management on a day to day basis
  • Analysing the risks of new lending products
  • Supporting the underwriting of new loan applications, providing constructive challenge and making recommendations for approval or decline
  • Ensuring compliance with regulatory expectations
  • Following up on incidents and audit actions

Why are they important?

The effective management of credit risk is a vital component of a bank’s overall approach to risk management and is essential to the long-term success of any banking organisation. Following the global financial crisis, regulators are now demanding more transparency around credit risk management and professionals in this field have a key role to play in ensuring that a bank’s credit risk exposure is within acceptable parameters.

Skills needed for this role

A Credit risk professional needs strong numeracy and modelling skills as well as the ability to deal with complex analysis. Commercial and business awareness is key, along with excellent communication and presentation skills.

Strategic Professional Options examinations linked to this role

Advanced Financial Management

Career opportunities presented by this role

After gaining experience at the junior levels, a credit risk professional can move through the ranks of management to senior roles overseeing teams. There is also the opportunity to move into financial management positions in other departments.

Competencies

High level competencies required include:

  • Corporate and business reporting

    A. Prepares financial statements, corporate financial and integrated reports for external stakeholders using appropriate technology.

    B. Leads effective decision making through analysing, evaluating and communicating performance and position of entities.

    C. Prepares financial statements for groups of entities using appropriate technologies.

    D. Monitors, critically evaluates, and advises on the relevant accounting standards, regulations, conceptual and financial reporting frameworks.

     

  • Data, digital and technology

    A. Identifies strategic options to add value, using data and technology.

    B. Analyses and evaluates data using appropriate technologies and tools.

    C. Applies technologies to visualise data clearly and effectively.

    D. Applies scepticism and ethical judgement to the use of data and data technology.
     

  • Financial management

    A. Links developments in global trade, markets, business practices and the economic environment to required improvements in the financial and risk management of an organisation.

    B. Advises on business asset valuations, capital projects and investments using appropriate analytical qualitative and quantitative techniques.

    C. Identifies, evaluates and advises on alternative sources of business finance and different ways of raising finance.

    D. Communicates and advises on the impact on financial decision making on current developments in regulation, governance and ethics.

    E. Assesses and advises on appropriate strategies to manage business and organisational performance regarding business and finance risk and effectively communicates the impact.
     

     

     

  • Governance, risk and control

    A. Evaluates organisational structures and governance to protect the long-term interests of stakeholders.

    B. Recommends appropriate strategies to ensure adherence to governance structures and application of best practice internal controls.

    C. Identifies and manages risk appropriately.

    D. Uses risk management for the best interests of an organisation and its stakeholders.

    E. Monitors and applies relevant legislation, policies and procedures.