2 – Loan portfolio

Publisher Summary This chapter provides an overview of loan portfolio management. The price of the loan is determined through a mechanism known as the funds transfer pricing (FTP) system. The FTP system has two sources of funds: internal-business units and the external marketplace. The major component of risk within the banking portfolio is interest-rate risk. This is because the asset base comprising loans and deposits usually have a different rate exposure causing interest-rate sensitivity and potentially liquidity risk. Rate and liquidity risk within the banking portfolio is managed by the treasury. This concern addresses the issues of defining and devising hedging programs for rate risk, liquidity, and optionality. Decisions to extend credit are delegated to the syndicate desk and the subsequent credit exposure is managed by the loan portfolio group. Major international banks set aside economic capital to absorb unexpected losses. They typically have an internal risk-management structure both to quantify and respond to a gradual change of risk via economic capital.