The Impact of Internal Rating System Application on Credit Risk Management in Banks

Abstract

Credit risk is the most important risk for banks which means that it is one of the most important factors for banks’ stability. The source of credit risk is the weakness of credit ability of a client which leads to bank’s losses. Losses are daily reality of every bank and according to that should be recognized, measured and implemented in credit risk managing models. The aim of this paper is to investigate how banks in Croatia are using internal rating system in their business on a daily basis, i.e. is the application of rating included in all phases of credit process. Data that will be presented in the paper will be collected through a questionnaire. The application of ratings in daily business of a bank is one of the most important minimal requirements for internal rating based approach application. Internal rating based approach is a significant in the process of validation and measurement of credit risk after Basel I approach.