Monitoring of Banks’ Risks Related to the Funding of Financial Enterprises

Abstract

The crisis period which commenced in 2008 highlighted the fact both at domestic and international level that in certain cases financial enterprises – which operate in a more relaxed prudential regulatory framework compared to banks – accumulated substantial credit risks that generated major losses for the financing credit institutions. This paper presents a simple, straightforward tool for monitoring banks’ risks related to the funding of financial enterprises operating in Hungary. This tool can be reproduced based on the balance sheet and income statement data of corporate databases, and at the same time its performance is stable and as such it can be widely utilised, it facilitates close, automated monitoring and can be used as a financial warning model, which permits the allocation of a relative risk level to financial enterprises either in the medium term or 2 years ahead. It can be concluded that, based on the foregoing, prior to the major world economic crisis that commenced in 2008, it would have been possible to identify risky financial enterprises and banks could have closed or amortised their exposures to risky financial enterprises earlier, as necessary. To our knowledge, at the time of the publication this type of risk measurement methodology is unprecedented in the Hungarian literature in respect of banks’ risks in relation to lending to financial enterprises.