tailieunhanh - Lecture Financial markets and institutions (4/e) – Chapter 20

In this chapter, we examine the major long-term securities issued by firms to provide for their long-term financing needs – long-term debt (bonds), preferred stock, and common stock – and evaluate their features. Also, in the Appendix to this chapter we analyze the potential profitability of a company refunding (replacing) an existing bond issue with a new one. | 8- McGraw-Hill/Irwin Chapter Twenty Managing Credit Risk on the Balance Sheet 20- McGraw-Hill/Irwin Credit Risk Management Financial institutions (FIs) are special because of their ability to transform financial claims of household savers efficiently into claims issued to corporations, individuals, and governments FIs’ ability to process and evaluate information and control and monitor borrowers allows them to transform these claims at the lowest possible cost to all parties Credit allocation is an important type of financial claim transformation for commercial banks FIs make loans to corporations, individuals, and governments FIs accept the risks of loans in return for interest that (hopefully) covers the costs of funding—and are thus exposed to credit risk 20- McGraw-Hill/Irwin Credit Risk Management The credit quality of many FIs’ lending and investment decisions has been called into question in the past 25 years problems related to real estate and junk bond lending surfaced at banks, thrifts, and insurance companies in the late 1980s and early 1990s concerns related to the rapid increase of credit cards and auto lending occurred in the late 1990s commercial lending standards declined in the late 1990s, which led to increases in high-yield business loan delinquencies concerns shifted to technology loans in the late 1990s and early 2000s mortgage delinquencies, particularly with subprime mortgages, surged in 2006 and continue to be a concern 20- McGraw-Hill/Irwin Credit Risk Management Larger banks are generally more likely to accept riskier loans than smaller banks Larger banks are also exposed to more counterparty risk off-the-balance-sheet than smaller banks Managerial efficiency and credit risk management strategies directly affect the return and risk of the loan portfolio At the extreme, credit risk can lead to insolvency as large loan losses can wipe out an FI’s equity capital 20- McGraw-Hill/Irwin Credit Analysis Real . | 8- McGraw-Hill/Irwin Chapter Twenty Managing Credit Risk on the Balance Sheet 20- McGraw-Hill/Irwin Credit Risk Management Financial institutions (FIs) are special because of their ability to transform financial claims of household savers efficiently into claims issued to corporations, individuals, and governments FIs’ ability to process and evaluate information and control and monitor borrowers allows them to transform these claims at the lowest possible cost to all parties Credit allocation is an important type of financial claim transformation for commercial banks FIs make loans to corporations, individuals, and governments FIs accept the risks of loans in return for interest that (hopefully) covers the costs of funding—and are thus exposed to credit risk 20- McGraw-Hill/Irwin Credit Risk Management The credit quality of many FIs’ lending and investment decisions has been called into question in the past 25 years problems related to real estate and junk bond .