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Managing Credit Risk in Bank Loan Portfolio

Managing Credit Risk in Bank Loan Portfolio

Copyright: © 2019 |Pages: 27
ISBN13: 9781522572800|ISBN10: 1522572805|ISBN13 Softcover: 9781522587477|EISBN13: 9781522572817
DOI: 10.4018/978-1-5225-7280-0.ch002
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MLA

Vojo Bubevski. "Managing Credit Risk in Bank Loan Portfolio." Six Sigma Improvements for Basel III and Solvency II in Financial Risk Management: Emerging Research and Opportunities, IGI Global, 2019, pp.10-36. https://doi.org/10.4018/978-1-5225-7280-0.ch002

APA

V. Bubevski (2019). Managing Credit Risk in Bank Loan Portfolio. IGI Global. https://doi.org/10.4018/978-1-5225-7280-0.ch002

Chicago

Vojo Bubevski. "Managing Credit Risk in Bank Loan Portfolio." In Six Sigma Improvements for Basel III and Solvency II in Financial Risk Management: Emerging Research and Opportunities. Hershey, PA: IGI Global, 2019. https://doi.org/10.4018/978-1-5225-7280-0.ch002

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Abstract

In this chapter, the Six Sigma DMAIC approach is applied to improve credit risk management in banking loan portfolio selection. The objective is to select the optimal loan portfolio which achieves the bank's investment objectives with an acceptable credit risk according to their predefined limits. Stochastic optimisation constructs an efficient frontier of optimal loan portfolios in banking with maximal profit and minimising loan losses, i.e. credit risk. Simulation stochastically calculates and measures mean gross profit, loan losses, variance, standard deviation and the Sharpe ratio. The Six Sigma capability metrics determines if the loan portfolio complies with the bank's limits regarding the gross profit; loan losses, which quantifies the credit risk; and Sharpe ratio, i.e. a risk adjusted measure. Also, the bank regulation limits are applied based on the bank's capital to control the maximum loan amount per loan investment grade. Analysis allows for selection of the best Efficient Frontier loan portfolio with the maximum Sharpe ratio.

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