The Importance of Credit Risk Management

Since the financial collapse of 2007, when so many of the world’s largest lending institutions crumbled, organizations have started recognizing the critical importance of credit risk management. Without proper management, they realized exposure to risk could prove devastating.

To begin managing credit risk, you first have to know what it is. Credit risk refers to the probability of a counterparty failing to repay a debt to an organization. This means risk can be actual, realized failure to repay or possible nonperformance. When a counterparty defaults on a debt, the company owed money loses revenue.

Monitoring credit risk at an enterprise level allows executive management and risk professionals to understand which potential accounts may come at too high a risk and above their identified risk tolerance. Credit ratings provide a scale to measure the credit worthiness and riskiness of organizations on an individual basis. The “Big Three” credit rating agencies are Moody’s, S&P, and Fitch. Ratings range from AAA, prime and riskless investments, to DDD, junk that’s in default. Any rating above BBB- is considered investment grade.

Organizations which value risk management attempt to determine the level of risk they could withstand in a worst case scenario. The OATI commodity trading and risk management (CTRM) solution, OATI webCTRM, efficiently determines appropriate risk levels, with a front-to-back office suite that tracks and identifies credit risk that could endanger your company, enabling you to focus on increasing revenues.

OATI’s solution calculates current and future exposures, assesses and tracks inbound/outbound collateral requirements, generates internal credit scores and more. Essentially, our software solution does the heavy lifting of credit risk management, so you don’t have to. Check it out by clicking here!

About the Author:
Mr. Jacob Cain has over 10 years of experience in the Commodity Trading and Risk Management industry. His experience includes energy and financial trading, energy scheduling and settlements, commodity risk management, renewable energy management, vendor solution selection and implementation, and fuel acquisition. As Account Executive at OATI, Mr. Cain oversees OATI’s strategy to provide optimal CTRM solutions to investment banks, power marketers, Independent Power Producers (IPPs), and hedge funds. His experience in commodity trading, scheduling, risk management, and settlements allows him to develop strategic recommendations with respect to a client’s CTRM business needs. Cain received his B.A. in Business Administration from Georgia Southern University and his MBA from the University of Tennessee.