Valuation of Guarantees
Introduction
Credit risk is the possible loss that an economic agent assumes as a result of non-compliance with the contractual obligations of the counterparties with which it is related. The concept is usually related to financial institutions and banks, but it also affects companies and organizations in other sectors.
Within banking activity, which is normally defined as the joint exercise of collecting savings and offering credit, the assumption of risks is natural, as in many human activities. Among the risks related to credit intermediation, credit risk assumes particular importance. It is most simply defined as the possibility that a bank borrower or counterparty will fail to properly meet pecuniary obligations assumed as principal and interest when due. Whenever this happens, a loan is delinquent. Among the main components of risk, the Probability of Default") (PD) and Loss Given Default") (LGD) have been the subject of greatest research interest. Typically, the logit model is used to predict both components. Financial ratios are used to estimate PD. Recovery time and the presence of collateral are used as covariates of LGD.[1].
Types of credit risk
Contenido
Una primera clasificación de los distintos tipos de riesgo de crédito puede realizarse en función de tipo de agente que lo soporta.
Supported by individuals
Individuals face credit risk when they deposit their money in a bank, lend it, or sign contracts requiring them to make a deposit (such as a rental agreement). If they are employees of a company, they are also exposed to the risk that it will not pay their salaries. The risk of loss can affect an individual's financial future.
In some countries, governments recognize that citizens' ability to assess their credit risk is limited and could therefore reduce the efficiency of the economy. Hence a series of laws such as those that protect depositors in banks. In the Spanish case, the government, through the Deposit Guarantee Fund, offers such guarantees.