Credit Risk Management Systems
Businesses big and small use credit in one way or another for business development and growth. And some companies issue credit to loan seekers. In either scenario, companies--be they loan givers or receivers--find ways to manage their credit exposures all the time. There are varying ways in which to do this, especially with a good credit risk management system.
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Credit Risk Management
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Credit risk management, by way of definition, is a process through which companies and organizations manage all aspects of their operations in the area of credit. This process is largely used by financial market companies to examine and limit their credit risk exposure. Banks for instance use a variety of strategies to manage their credit risk exposure, including credit evaluation and analysis of potential customers.
Credit Bureau Management System
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Companies and individuals seek credit extensions from financial organizations. Some of these organizations use external credit system management agencies to evaluate credit seekers. In the United States, for instance, many loan granting organizations use the three established credit bureaus--Equifax, TransUnion and Experian--to evaluate all credit applications. These credit agencies use a point scoring system (to produce the commonly known FICO score) to evaluate the creditworthiness of individuals and companies. Results are compiled and sent to companies seeking such information for a fee.
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Hedging
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Within the realm of asset management, portfolio managers often employ hedging strategies to guard against overexposure of their portfolios to unanticipated market conditions. This strategy has been popularized by hedge fund managers. The standard technique used in a hedging strategy is to guard against market declines by also establishing short positions in stocks as a hedge against long stock positions. During stock market sell-offs, losses in long positions are offset by gains in short positions. Many hedge funds managers use margins as part of their credit sources, which involves trading on borrowed money. Losses encountered in the hedge fund portfolios must be paid back to the credit provider when such positions are closed.
Overexposures
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Companies are often exposed to varying levels and degrees of credit risk all the time. An overexposure to credit risk often poses a danger to a company's financial health in case things go wrong. A good way to demonstrate this is by using the overexposure of some companies to the real estate subprime markets, which collapsed in 2008, and saw the liquidation of many companies, from banks to insurance corporations and others. Many companies now strive to balance and spread their risk exposure in different ways.
Central Database
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Many organizations use a consolidated credit information system to manage and evaluate their credit data on all individuals seeking credit extensions through a loan. All credit applications are often evaluated through a scoring system that evaluates the loan seeker's application. Based on the credit score, employment security and the loan seeker's finances, a decision is made one way or the other.
Other credit management databases may be used for monitoring a company's credit risk exposure. The system issues warnings that the company has exceeded its predetermined credit risk tolerance levels.
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