The Issue of Credit Risk - Essay Example

The paper "The Issue of Credit Risk" is a brilliant example of an essay on finance and accounting. Credit risk is a risk that arises following a potential that a borrower will fail to honor their obligation to repay the loan as per the agreed time and terms. For banks, loans that they give to customers are the main source of credit risk. There is usually the risk that customers might default in paying the loans. Other sources might be off as well as on the balance sheet. Off-balance sheet causes may include commitments on loans, letters of unfunded credit and lines of credit.

A reduction in the required rate of return (RRR) may be used as a way of preventing credit risk. This has been indicated by Bloomberg news concerning the Peoples Bank of China (PBOC), showing their system-wide wide cut in RRR since May 2012, as a way of preventing credit risks, following a decreasing debt ratio of China as decreasing from 209 percent to 125 percent by end of 2008 (Bloomberg 2014). The news shows RRR as being flexible in that it can be reduced in one month and increased in the next month, lowering it in sections and holding it constant in other sections. PBOC is seen to have reduced RRR in the banks in rural areas and thus lowering the ratio for small renders and injecting liquidity into some other banks using other new financial tools like facility for medium-term lending and pledged supplementary lending (Bloomberg 2014). However, there is a danger of the easier credit flowing to areas that are economically less productive, which arises out of reducing RRR across the board. Read More