With the establishment of credit rating and credit risk, there are important best practices which must be implemented to ensure risk control. In 2004, the bank of Israel released a mandate that all banks must ensure compliance with Basel II requirements. This was aimed at ensuring establishment of a risk management system with best practices.
In order to achieve this target, financial institutions and banks were expected to develop advanced technological tools and financial instruments to manage exposure to risk. Banks and financial institutions use these best practices in calculating their credit risk using spreadsheets. This important best practice went a long way in risk management. With time, there had been need for an established integrated system for credit risk control to ensure continuation of best practices at every level. Therefore, the system had to be developed based on risk management strategies to bridge the gap in analyzing and decision making.
There are many solutions which have been designed in compliance with Basel II to assist banks in credit risk control. The main advantage of using applications as solutions for compliance with Basel II for credit risk control is that it aids in decision making. They ensure best practices in Value at Risk (VaR) evaluation and calculations on a monthly basis. VaR provides banks with enough guidance on knowing how much of money has been given out as loans and what the progress is. There are times when business people who have taken bank loans may fail to comply with best practices and fail to pay back on the agreed time. This is mostly because there is a delay on the consumers’ part to pay for the products or services.
It is important to appreciate the fact that there are budgets announced by the government every year. At the end of the fiscal year banks and other financial institutions need to evaluate the VaR to ensure best practice and risk management. This helps in knowing how well banks have complied with the Basel II and how well best practices were implemented.
Therefore, best practices in credit risk control involve evaluation of VaR and best practices for Basel II compliance. In addition to these, banks and other financial institutions must implement the use of right risk management tools and software applications.