CreditRiskManagementEnhancingYourBottomLine EbrahimShabudinManagingDirectorDeloitte ToucheLLP TheAFP23rdAnnualConferenceNewOrleansNovember3 6 2002 CreditBackground Thoroughidentificationandaccuratemeasurementofcreditrisk supportedbystrongriskmanagementcanhelpimprovethebottomline Anuncertainandvolatileeconomicenvironmentsignificantlyimpactsthisability Thedesiretogrowandturninoutstandingresultshasatendencytoputpressureonthechecksandbalanceswithinbusinesses ValueProposition Creditplaysacriticalrolein selling productsandservicesExpandsrevenueopportunitieswithcreditworthy incrementalcustomersUtilizesinnovativestructurestosupportbusinessrelationshipsEffectivecreditriskmanagementlimitscreditlossesandprovidesstablecashflowsandearningsMarketplacerewardscompaniesexhibitingearningsandcashflowstabilitywithhigherP EmultiplesMarketplacepenalizescreditinducedvolatilityand surprises Raisesquestionsaboutqualityofmanagement CorporateCreditRisk CompaniesareexposedtosignificantlevelsofcreditriskemanatingfromdifferentsourcesAccountsReceivablesOtherNotesReceivablesBuyerandFranchiseFinancingWithRecourseFinancingProjectFinanceStructuredTransactionsLeaseswithRecourseDerivativesExposuresFX InterestRateRisk Commoditiesetc CollateralRiskParentorThirdPartyGuaranteesCommercialandStandbyLettersofCreditNotealsothatCriticalSupplierstothecompanymayposespecificcreditrisk DSOImpact anexample CreditasaFacilitator CreditriskmanagementisimportantCreditisafacilitatorofbusinessgrowthandperformanceHighbusinessmarginstendtoattractlowerqualityclientsandthereforehigherriskprofiletomanageClients buyers maybeconcentratedinselectedindustriesandprovidelimitedportfoliodiversificationopportunityPoorcreditriskmanagementresultinginnegativeimpacttobottom lineisheavilypenalizedbymarkets CreditStrategy RiskTolerance SpecificQuantifiableObjectivesManagementReviewMethodology CreditStrategyStatementandRiskToleranceCoordinationwithBusinessPlan Thebusinessstrategiesandobjectivesdrivetheestablishmentofcreditpoliciesandprocedures Measurementandreportingaswellastheuseofcurrenttechnologiesenhancecreditdecision makingandimproveriskmanagement Theentireprocessiscontinuallyre evaluatedandimproved CreditRiskAreastoConsider CreditPolicyCreditApprovalAuthorityLimitSettingPricingTermsandConditionsDocumentation ContractsandCovenantsCollateralandSecurityCollections DelinquenciesandWorkouts ExposureManagementAggregationControlPeriodicAccountReviewsPayments AgingCreditConditionCompliancewithCovenants TermsTechnology ReportsTransactions BookingsRisk adjustedReturn SalesChannelsRiskStrategyUnderwritingStandardsCreditApplicationAnalysisBusiness IndustryFinancialCreditCreditScoringandRatings Origination Assessment Administration Monitoring Control RiskManagement PortfolioManagementConcentrationDiversificationAllowanceforBadDebtsRiskMitigationObjectivesTypeofExposureInstrumentsorMethods ValueCreation BusinessPerformanceMeasures Organizationsneedarigoroussetofmeasurestosupportcontinuousimprovement Performance basedmanagementutilizesmetricsthatmeasureactualperformanceagainstpredeterminedthresholds Thethresholdsareestablishedtakingintoaccounttheorganization sstrategy operatingenvironmentandprocesscontrols Themeasuresdrivevaluecreationandshouldsupportproblemidentificationandcorrection BusinessStrategySystemsOperationsFinance PerformanceManagement Saleschannels Contracts Documentation Creditanalysis Creditlimit Pricing terms CreditAnalysis CreditDecisions Collections CREDITPOLICY Collateralacceptance Portfoliomanagement Financialanalysis Disposal Riskmitigation Collateralmanagement Customermanagement Exposuremeasurement Managementreporting Exposureaggregation Recoveries Creditscoring Riskrating RISKMANAGEMENT CreditRiskManagement sInter relatedActivities Compliance Origination Reporting Transactions CreditPolicies Procedures Analysis RiskManagement Governance ControlandImplementation MeasurementMethodologies Technology DataIntegrity CreditStrategy RiskTolerance Acompleteandcoherentriskmanagementframeworkcontainsthefollowingelements CreditRiskManagement ANewParadigm Anewbusinessparadigmhadevolved causingalackofrelianceongoodfundamentalanalysisTheideathatstockmarketvalueswouldcontinuetogoupindefinitelyIncreasinglycompetitive complexandvolatilemarketplaceHigherthanexpectedactualdebtburdensExtensiverelianceonunrealisticfuturecashflowsFailuresincorporategovernanceQuestionablepersonalandcorporateethics ImplicationsforCorporateGovernance CurrentorganizationstructurestoberevisitedClarityaroundrolesandresponsibilitiesNeedforhonesty integrityandindependence self regulation TechnicalexpertiseofpeopleandstrongmanagementprocessesImproveddisclosurerequirementsImportanceandimplementationofsanctionsIncreasedlegislationandcompliancerequirements Foundation CreditRatingandUnderwritingStandardsRiskIdentification Origination CreditAdministration etc ShortTerm ManagingExpectedLossRiskIdentification TransactionStructuring Approval PricingDecisions Reserving etc NearTerm ManagingEconomicCapital CreditVaRPortfolioRis