Case study of Enterprise Credit Risk Management

As mentioned in the Basel Accord, the objective of credit risk management is to maintain credit risk within the safety boundary through dynamic assessment, real-time monitoring and outcome feedback, so as to obtain the highest risk-adjusted returns. Small and Medium Enterprises (Sme) credit risk management mainly includes the following aspects:

When economic subjects face credit risk in business operation, enterprises should develop targeted measures to ensure effective control and reduction of risk probability in view of possible hazards and losses caused by credit risks. Secondly, it is necessary to control the credit risk, and the choice of control method should match the economic loss that the credit risk may cause, which can effectively monitor every aspects of credit risk management. Finally, feedback of opinions and results should be carried out in time to adjust the original method in time. 

The approach of Savings and Credit Cooperative Organisation (SACCO) to Credit Risk

Credit business is the most important asset business of commercial banks, which can recover principal and interest through lending and make profits after deducting costs. Therefore, credit is the main profit means of commercial banks. Similarly, SACCO was established to improve financing efficiency for low-income groups and small and medium-sized businesses. According to Kariuki, SACCOs' main goal is to provide owners with savings and credit in an efficient way. Bhattarai added, the total revenue of the institution is generated by making loans to customers and earning interest. It can be said that the total revenue is closely related to customer credit risk.

Sacco's credit line had no collateral requirements, so there were numerous payment defaults. Markowitz's (1952) MPT notes that portfolio diversification changes this dilemma. SACCOs identifies the credit risk of loan applicants based on this element of investment portfolio. If the client's credit is not up to standard, then they cannot become partners, through strict entry to reduce the risk of credit sales. SACCOs evaluates customers' credit ratings in a scientific way, which reflects the dynamic assessment process of enterprise credit risk management.

A case study of MF Global

MF Global is the world's largest futures trader and one of the 100 largest listed companies in the UK. Due to its holdings of us $6.3 billion of European sovereign bonds, MF Global was downgraded by several rating agencies after its financial statements were released on October 25, 2011, resulting in stock price declines and financing difficulties. The Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) demanded that MF Global sell its brokerage business to protect its clients. In the sale of its brokerage business, MF Global was found to have misappropriated nearly $600m of client money for its own business and lost money because of poor operating decisions. In light of this, the SEC and the CFTC demanded immediate bankruptcy of MF Global.

Through real-time monitoring, the SEC and CFTC were in control of the operating conditions of MF Global, so as to prevent MF from defaulting on its debts due to poor business conditions. When things went wrong, the SEC and CFTC required MF to take immediate steps (eg: selling businesses and filing for bankruptcy) to mitigate risks and losses. This process reflects the real-time monitoring phase of credit risk management.

 

Author: Cuiwen HUANG

Date: 13.10.2021

 

Reference:

Hilary, T. (2012) The Collapse of MF Global: What Happened and Lessons Learned, Available at: https://ssrn.com/abstract=2603511 (Accessed: 13th October 2021).

Josiah, A. and Stephen O. (2021) ‘Credit Risk Management and Efficiency of Savings and Credit Cooperative Societies’, Journal of Applied Finance & Banking, 11(1), pp. 99-120.

Paul, E.P. (2013) ‘Behind the Collapse of MF Global’, Journal of Agricultural & Applied Economics Association, 28(2), pp. 1-5.