Chapter 5 takes a deeper look at how banks manage credit risk, starting with portfolio risks and credit exposure. Credit portfolio modeling is complex, and while some banks do build their own models, most use commercially available models; Section 5.3 provides a brief description of such tools. Credit monitoring was described in Chapter 4 in Section 4.6 on the credit process, but it features here again along with early warning signals, given their important role in the management of the portfolio credit risk profile. Section 5.8 explains remedial management and provides a framework of next steps in the event of distressed loans. The final section discusses the Basel III Accord's guidelines to measure and manage credit risk.
Key Learning Points