Abstract
Banking prudence and efficiency to manage their risks in different business cycle and environment would help to alleviate crises and losses. Hence, the effective assessment of credit risk is an essential component of a comprehensive technique to credit risk assessment and critical to the long-run of not only banking institutions but also the economy as a whole. Therefore, it has received a great interest from scholars across finance and economics to investigate such assessments by banks in different countries using diverse theoretical underpinnings and methodologies. Hence, this paper is developed to review analytical conceptualisations of credit risks assessments that have been developed in the academic literature. By means of a systematic review, it provides a comprehensive analysis that encompasses approaches used in research papers. There has been no prior review on analytical conceptualisations in this area. Moreover, this review is done in a systematic manner, i.e. categorising journal articles into different categories such as purposes, perspectives and methodologies through a transparent and thorough process. Thus, it will be able to provide an objective review. Finally, the paper will outline the evolution of methodologies and theoretical underpinnings in credit risk management research and a landscape for possible future research directions.
Highlights
Banking prudence and efficiency to manage their risks in different business cycle and environment would help to alleviate crises and losses
This paper will only focus on Credit Risk Management (CRM) and Credit Risk Assessments (CRA)
The purpose of this paper is to illustrate and to evaluate analytical conceptualisations of credit risk assessments that have been developed in the academic literature
Summary
Banking prudence and efficiency to manage their risks in different business cycle and environment would help to alleviate crises and losses. The effective assessment of credit risk is an essential component of a comprehensive technique to credit risk assessment and critical to the long-run of banking institutions and the economy as a whole. The failure to manage credit risks properly could result in more than direct accounting loss It encompasses opportunity costs, transaction costs and expenses associated with non-performing asset over and above the accounting loss. Transaction costs and expenses associated with non-performing asset over and above the accounting loss It can affect banks’ portfolio, thereby attracting liquidity risk and in the worst cases, it can have negative effects on both financial industries and economies. By referring back to Horneff’s (2006) statement as provided above, this indicates that every level comprises of decision making process, considering risk-return trade-offs and optimising stakeholders’ targets
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