Credit portfolio management is a key function for financial institutions, especially banks (but also including insurers and institutional investors), with large, multifaceted portfolios of credit, often including illiquid loans. Historically, credit portfolio management was seen as merely understanding the institution’s aggregate credit risk, improve returns on those risks and identifying and managing concentrations of risk.
The 2007 financial crisis changed the way most functions at these institutions operate and manage their credit portfolio. While the historical role of such a function remains, new regulatory requirements, especially with respect to capital and liquidity, increasing cost and margin pressure, and changed market conditions have pushed credit portfolio management into a broader role with the need to align closely with other areas, such as finance, treasury, risk data and methodology, and business-origination functions. Valuations play a key role in the various stages of credit portfolio management. The Covid-19 pandemic has further increased the focus on active credit portfolio management.
- Overview of credit portfolio management, including credit approval/ reviews, and corresponding types of valuation exercises (e.g. General credit; asset-specific credit; asset(s) as collateral, and related business/ asset valuation exercises
- The role of valuations in pricing credit
- Steps in credit approval/ monitoring process – Is a new valuation required? Most appropriate valuation approach/ method selection? Preferred preparation and presentation?
- Valuations by types of assets (e.g. immovable/ movable)
- New credit vs. annual credit review/ refinancing
- Leveraged lending
- Covenant conditions
- Timing/ period of credit review
- ‘Bank perspective’ – the requirements, including reference to specific ECB supervision/ BIS requirements on credit reviews, and EBA guidelines on loan origination and monitoring
- Requirements for valuations by bank’s architect
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