What Is Credit Risk Management?

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Credit risk management is exactly what it sounds like: monitoring risk within a company's or lender's operations. Credit risk management is an essential component of successful business ventures (especially in high finance), as it controls and guides a profitable business through transactions.

History

Credit risk management has arguably existed since the beginning of banking. The underlying principle of banking is lending--and the underlying principle of lending is risk mitigation. Determining a borrower's ability and propensity to repay is essential to successful lending. As banking and finance have evolved, so has credit risk management.

Significance in Small Business

Credit risk management is an important part of any business. For example, in a small business, a person (usually the owner) assesses the investments and loans the company is committing to. The owner must think long-term and look critically at the soundness of each investment and loan as the company's financial health depends on safe, profitable investments.

High Finance and Loans

Credit risk managers in high finance earn lucrative salaries. These folks are responsible for analyzing the financial health of huge, often multinational businesses with thousands of employees and multiple levels of business units. These credit risk managers not only look at the business's loans, they must also review and determine the soundness of the credit the company is extending to customers.

Other Financial Products

With the development of sophisticated financial instruments--bonds, equity, swaps, futures--credit risk managers have had to evolve as well. These complex financial tools often involve many stakeholders--lenders, investors, shareholders. A successful credit risk manager is a savvy investor and money manager who can spot flaws in these instruments and determine the viability of a given transaction.

Conflicts of Interest

Most large companies employ their own credit risk managers. These managers are often extremely well-paid. Therefore, influential executives can sometimes persuade credit risk managers to abandon their analysis for the purpose of furthering profit. The governmental overseeing body, the Securities and Exchange Commission, is responsible for not only watching transactions but also keeping a keen eye on credit risk managers.

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