Accounting problem

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Accounting problem- The Case of Credit Risk In Banks

The premier role of a bank in an economy is making advances to customers , on current accounts , and granting their clientele long-term loans . This gives rise to the concept of credit risk whereby a bank incurs the risk of financial loss in the case a debtor does not payback a loan . The lending back on a basic model will trade-off the benefits of a loan with the risk of non-payment ergo interest rate (the interest rate

charged is linked to the level of risk ) Some protective clauses in the loan agreement to protect the bank include Limiting the debtor 's ability to intentionally weaken their balance sheet for instance by buying back shares , paying dividends or undertaking more loans audits to monitor the debt allowing the debtor an option to buy back the loan on the occurrence of some specific events or when financial ratios such as the debt-equity ratio deteriorate (Adler , 2002

There are specific financial analysis techniques for analyzing the collective loan risk of her debtors . On top of this , given that the bank is bound to incur defaults , there are also techniques to ensure that the bank is not exposed financially which would affect the shareholders and other customers . As part of an overall analysis tool of a commercial bank 's operations with the acronym CAMELS (Capital adequacy , Asset quality , Management competence , earnings ability , liquidity risk sensitivity to market risk Asset Quality analysis is...