International Banking Essay Example | Topics and Well Written Essays - 1500 words

International Banking - Essay Example investments can also be facilitated and banks where they act as agents to customers. If for one reason or the other, a bank is unable to meet this statutory obligation, the resultant is a banking crises, the banks are then said to have failed. Another terminology that requires definition is credit risk. This can alternatively be referred to as Expected Loss and is a product of Probability of default, Exposure of default and loss given default. These three factors which are considered in credit risk all have standard measurement yardsticks against which they are calculated. Probability of default (PD) is measured using statistical data (past default rates, external and internal ratings together with credit scoring. Exposure at default (EAD) takes into consideration remaining outstanding debt alongside other forms of credit like guarantees, commitments e.t.c. Loss given default in its own case is measured considering the amount and values of the security on ground. Other kinds of risks that have contributed in one way or the other to past banking crises are as follows In the 1970's Western European and American banks were involved in credit risk and its attendant problems when they loaned out deposits of oil- rich OPEC countries to oil-poor undeveloped countries. The expected profits form these loans never materialised because the borrowing nations defaulted in payment. To further complicate the issue some banks within the period made out loans to just one nation that amount to a substantial past of their assets. In the events of a default in payment by this nation, the bank in question is sure to incur such a loss capable of precipitating financial crises. In modern day banking, banks try to minimise losses by greatly dispersing their credit risk. It could be by arranging it in such a way that the risks are not concentrated in country or by spreading risk over different sectors of an economy. This is an improvement of what obtained in the past. Risks, nowadays, are spread to withstand world shaking defaults. Risk Management is the process of reducing the threat of loss due to uncontrollable events. There has been a continued improvement in Risk management over the years with four major approaches being adopted. The first approach is Risk Avoidance, and this approach may be adopted when the risk involved in a particular venture far outweighs whatever gains that might result. Depending on the risk management team, credit facility may be denied the seeker on account of the risk level. The second approach is to minimise losses through sound management principles and techniques, properly