Credit Portfolio Strategy

From Open Risk Manual


Credit Portfolio Strategy denotes the set of concrete plans and constraints (investment strategy, hedging strategies, workout strategies) that help shape Credit Portfolio Management activities


The emphasis of a credit portfolio strategy depends heavily on the mandate and business model of the organization. The three main components of any specific strategy reflect how it addresses the life cycle of credit assets:

  • the Credit Origination phase that is shaped by the investment strategy
  • (optional) active management of the performing portfolio
  • the NPL Strategy for credit assets that becoming non-performing

Determining Factors

  • The maturity of the market / banking system where the portfolio manager operates, which defines among others the type of data available
  • The portfolio scope, i.e. the permissible (Lending products)
  • The resources and tools available to manage the portfolio
  • The Risk Appetite of the portfolio manager / organization and the amount of Risk Capital available to support operations
  • The applicable accounting regime (e.g. IFRS 9 or CECL)


A concrete Credit Portfolio Strategy is specified as follows

  • The time horizon of the strategy, especially if the strategy involves a material deviation from the prior state
  • The overall volume / size objectives (e.g. a growth, steady or reduction strategy) for the Credit Portfolio
  • The target Credit Risk characteristics (e.g. rating profile) and acceptable performance metrics such as Risk-Adjusted Return on Capital

Besides the upfront specification, a strategy may also involve contingent elements that reflect

  • the performance of the portfolio
  • market development (e.g. demand / supply and competition)
  • broader economic developments
  • other significant risk factors