Significance

Credit risk management has become of paramount importance with the failures to accurately determine credit risk. This includes banks, corporations, vendors and service firms that are vulnerable to credit defaults.

Function

The solution to this can be sought using technology or personnel to determine a corporation's exposure to risk. It must know where it is concentrated among potential debtors, the likelihood they may default and the possible timing of the default. Once a business has a clear picture of credit risk, it can manage it however it sees fit to protect its bottom line.

Potential

There are many information technology products that can track and monitor credit ratings in the market. Credit risk professionals can use this as a template to determine how iffy extending credit may be to certain businesses and consumers.

Considerations

Nothing beats the human mind when it comes to understanding credit risk. While there are computer tools available, an experienced person will be able to pinpoint the risk with a degree of severity. There are situations in life that a computer cannot understand so each credit risk should be screened by experienced personnel.

Benefits

Using both information technology and personnel can be very helpful at managing credit risks. By having this in place, businesses can prevent major financial losses or even a series of losses.

Source:

Bank for International Settlements: Principles for the Management of Credit Risk

ERCIM News: Improving Banks' Credit Risk Management