Classification and Quantification of Credit Risk

In any business it is necessary to classify, measure and manage accurately variables which represent uncertainty, or risk, to the normal functioning of operations. This is especially true in the banking industry, where the essence of the business is to reward an institution for risks taken and managed. The effective management of risks is typically accomplished through a risk management framework where an institution identifies, classifies, measures and manages the different risks inherent in its line of businesses. Knowledge of risks affecting a given business allows losses to be controlled or avoided and profits to be maximized.