Literature Review On Credit Risk Management In Banks

Therefore, it has received a great interest from scholars across finance and economics to investigate such assessments by banks in different countries using diverse theoretical underpinnings and methodologies.Hence, this paper is developed to review analytical conceptualisations of credit risks assessments that have been developed in the academic literature.

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The bulk of investment-banking oriented body of literature on risk management usually defines risk in an objective way not differentiating according to the needs of different investors or stakeholders.

On the other hand, there are researchers who consider it to be ‘relative’ rather than an absolute concept (Balzer ). Firstly, due to such differences, there are inconsistencies in conceptualisations of CRA.

Thus, it will be able to provide an objective review.

Finally, the paper will outline the evolution of methodologies and theoretical underpinnings in credit risk management research and a landscape for possible future research directions.‘Over the past two decades, the financial world has evolved from [a] return driven to a genuine risk management industry.

Hence, CRM is understood as a process that starts from regulatory level, second, from banks’ strategic levels, then continues to the operational levels.

By referring back to Horneff’s () statement as provided above, this indicates that every level comprises of decision making process, considering risk-return trade-offs and optimising stakeholders’ targets.It encompasses opportunity costs, transaction costs and expenses associated with non-performing asset over and above the accounting loss.It can affect banks’ portfolio, thereby attracting liquidity risk and in the worst cases, it can have negative effects on both financial industries and economies.Moreover, rational decisions tend to be made based on unrealistic assumptions (Robbins and Coulter In CRA, it is not about solving a problem but contemplating whether to take an opportunity for return to realise in the future from investment.These opportunities come with uncertainties and it is impossible for banks to have complete information.In other words, optimal ‘risk perception’ is not attainable.Thus, the term ‘bounded rationality’ is created by Simon ( ‘The human being striving for rationality and restricted within the limits of his knowledge has developed some working procedures that partially overcome these difficulties.Similarly, the full information about the consequences, in this case, borrowers engaging in risky activities cannot be obtained.Herne () finds some evidence showing that individual choices disappear when individuals have an opportunity to learn and correct their choices to be more in line with the standard utility model depending on the situation where decision making takes place, thereby concluding that different institutional structure affect such differing preferences.The term risk management certainly is not confined to what is best denoted with risk control: Measuring risks, setting limits and ensuring adherence to these limits.This is necessarily part of the whole process of risk-return optimisation …. also compromises the decision making process of considering risk-return trade-offs and optimising stakeholders’ targets …‘.