Credit risk assessment

Abstract

Lenders, regulatory agencies, and investors have increased their demand for credit risk exposure information to appropriately price risk and evaluate risk migration patterns that affect institution safety and soundness. This review provides a synthesis of the advances in credit risk assessment made through journal articles and other professional reports. Contributions in three primary areas are considered: (a) how the credit risk assessment problem has been defined and redefined over time in response to the changing information needs of lenders and regulators, (b) how methodological innovations have improved credit assessment procedures, and (c) how the efficiency of financial markets has changed due to the evolution of credit risk assessment. The paper concludes with a discussion of how transactional and relationship lending approaches are expected to evolve in the future and whether measures can be developed to more accurately assess factors such as management capacity and commitment to repay.