Credit Portfolio

From Open Risk Manual


Credit Portfolio is any collection of credit exposures that is formed as part of financial intermediation activities (e.g., regular Lending products or derivative contracts) or as an investment in Credit Risk sensitive securities (such as corporate bonds).

Types of Credit Portfolios

The three typical classes of credit portfolios are:

  • Loans and related product portfolios originated by lending businesses. These are typically further differentiated along the two major types of credit
    • Retail credit portfolios such as home mortgages, credit cards etc., collectively denoted Consumer Finance)
    • Corporate credit portfolios (corporate credit facilities), the are further split into SME Lending and Large Corporates segments
  • Bond portfolios, comprising of credit risky securities investments (Sovereign Bonds, Corporate bonds, Securitised debt etc)
  • Counterparty exposures arising from bilateral derivatives transactions

In large financial conglomerates all of the above types of credit exposures might coexist.

Credit Portfolio Management

  • Practices of managing credit portfolios tend to follow the above Business Model split and can be divergent in methods, with the discipline of managing commercial client loan portfolios denoted more frequently as Credit Portfolio Management.
  • Bond portfolio management (e.g. including corporate and sovereign debt) is usually discussed under Asset Management, reflecting the lack of a client relationship and the management of exposures primarily as Spread Product.
  • Derivatives exposure portfolios have aspects of both the above. They constitute client business, but with primary sensitivity to market credit spreads and with the further complications of strong coupling with the underlying markets.

Issues and Challenges

  • One area where the diverging practices pose a challenge to bank risk management (in particular) is in the integration of total credit exposure to counterparties (which may involve loans, bonds and derivative exposure).
  • Another issue is that diverging regulation and capital requirements for holding credit portfolios may create Regulatory Arbitrage

See Also