FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION SPECIALISATION : FINANCE AND BANKING BACHELOR ’S DEGREE THESIS Coordinator : Lect.univ.dr.ec. Manta… [600408]

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UNIVERSITY OF CRAIOVA
FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION
SPECIALISATION : FINANCE AND BANKING

BACHELOR ’S DEGREE THESIS

Coordinator :
Lect.univ.dr.ec. Manta Alina -Georgiana

Student: [anonimizat]
2016

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UNIVERSITY OF CRAIOVA
FACULTY OF ECONOMICS AND BUSINESS ADMINISTRATION
SPECIALISATION : FINANCE AND BANKING

CREDIT RISK MANAGEMENT IN BANKING

Coordinator :
Lect.univ.dr.ec. Manta Alina -Georgiana

Student: [anonimizat]
2016

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CONTENT S

INTRODUCTION 4

CHAPTER 1. NATURE AND TYPOLOGY OF BANKING
RISKS 6
1.1. Nature of Banking Risks 6
1.2. Special Features of Banking Risks 7
1.3. Typology of Banking Risks. New F orms of Expression 9

CHAPTER 2. CASE STUDY ON CREDIT RISK
MANAGEMENT ON THE EXAMPLE OF BRD – GSG 16
2.1. Credit Risk. Limitations and Restrictions 16
2.2. Methods and Techniques for Managing Credit Risk 17
2.3. Trends and Perspectives in Managing Credit Risk in the
Bankin g Sector in Romania. The impact of the International
Financial Crisis 22
2.4. Methods of Managing Credit Risk at BRD -GSG 25

CONCLUSIONS 31

REFERENCES 32

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INTRODUCTION

Risk represents a phenomenon t hat people and organizations interact since ancient
times. The risk is manifested both in the everyday life of the people and at the level of social
organizations. Basically, any decision -making process and any strategic planning involve
risk.
The very soc ial, economic progress and the cultural heritage of mankind would not
have been possible without taking risks and that is why the issue of risk has come to the
attention of practitioners and theorists from ancient times.
The risk manifests itself in the ma jority of human activities due to the fact that human
society is not static, it is in a continuous process of evolution and, for this reason, our
existence and our environment are constantly changing.
The risk is found today in the center of the banking bu siness. Risk management
means the function key of modern banks focused on the market activity. The problems that
arise in the banking systems in the wake of unsuccessful management of resources and
investments can be found in all economies. Bank failures p ut into question the stability of
the banking system, even in countries where supervision is well developed.
Operating with innovative products and volatile in an environment heavily
computerized and dematerialized services, banking and financial instituti ons often use tools
and procedures geared toward banking and high efficiency to establish financial -banking
configuration strongly polarized, forming and driving customer demand for banking
products and services towards combinations and investment risk -bearing assemblies.
Protecting from risks, mitigation of their effects measured by losses generated, and
ensuring coverage of financial institutions faced with the diversity of risks has le d to the
continuous improvement of risk management, innovation , and di versification in instruments.
Banking rules, derivative instruments, diversification of portfolios, the rules and
procedures for protecting resources, deposit and capital, are ways in which these institutions
are trying to control the often devastating ef fects, of the impact of financial risk.
The paper called " Credit risk management in banking " is presented the analysis of
credit risk, whereas its methods of analysis made on financial and accounting systems of the
Bank for the purpose of the proposal of m ethods for effective management of this type of
risk to be used by bank managers to improve the Bank's financial performance.
I considered that the present work should be structured in two chapters, in turn,
divided into several subsections to the level to which we examined in detail the theoretical
aspects that have been blended with practical situations and on which we have formulated
opinions which constitute a starting point for creating new frontiers in the field of credit risk.
In the first chapter, t itled " The nature and typology of banking risks ", we have
decided to tackle the complex issue of the nature of banking risks, based on the concept of
banking risk, until the analysis of Genesis and particularities of banking risks. The chapter
also focuses on the key topic of the theme -work , intending to clarify specific terminology
credit risks and their classification depending on several factors.
The second chapter titled " Case study on credit risk management, on the example
of the BRD -GSG " is divided in to 4 subsections. One of the four subsect ions of this chapter,
namely, " Trends and Perspectives in Managing Credit Risk in the Banking Sector in
Romania. The impact of the International Financial Crisis " is focused on credit risk

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typology on the theory and practice of banking in Romania this way surprising aspects
worthy of note.
Another subsection , called " Methods of Managing Credit Risk at BRD -GSG " holds
a significant share in-depth knowledge of importance due to the various methods of
monitoring and man agement of credit risk.
Through this work, I tried to realize shaping overviews of the theoretical and practical
content of credit risk, in the hope that it will serve as a basis for documentation and working
tool for future studies of complex issues relat ed to risk.

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CHAPTER 1. NATURE AND TYPOLOGY OF BANKING RISKS

1.1. Nature of Banking Risks

Banking risk can say that it is a phenomenon that occurs during the course of banking
operations and causing negative effects on the activities concerned by the deteriorating
quality business profi le decrease or even record loss , impaired functionality bank. Credit risk
may result in the bank by customers or due to e xternal competitive environment .
Risk can b e defined as an unce rtain event, but possible , its origin being in uncertainty
is detrimental effects of a given product can not be removed; appears in the process of human
activity , social, economic , political and in the relationship between man and nature .
The risk, in the Dictionary of Banking terms, is presented as an uncertainty as an
asset to the expected rate of profitability or to produce a loss.1
In his comprehensive "Bank risk management", Philip John says that "when defining
the risk and risk management, most autho rs focus on the functions of intermediary banks in
the sphere of financial risks through their Division; from this point of view is specially
treated the problem of some unforeseen losses at banking assets, losses caused by market
risks, credit or liquidit y ".
Magazine ”Risk consult” states that "risk is basically like a threat event affecting a
company's ability to operate and to track the performance of the strategic objectives. The
risk arises not from the probability that something good happens, but the likelihood o f
something bad is happening". "Also the economic life is governed by uncertainty and any
upcoming events for protection is, by definition, struck by the risk of failing to ach ieve the
parameters laid down"2.
We bring the opinion of Ion Nițu i llustrating the "Bank risk management" risk
permanent existence, like a shadow that accompanies all the Affairs of the Bank and occurs
or not, depending on the conditions under which it is created. Most simply put, banking risk
is the probability that in a transaction may not obtain the expected profit or even a loss occur.
It can be affirmed that the Bank's risk is a phenomenon that occurs in the course of carrying
out banking operations and causing negative effects on the activities in question, by
damagi ng the promotion of business, profits or even losses record, affecting the functionality
of the Bank.
In our opinion, the risk is now banking on the whole sphere of activity of banking
companies and represents the uncertainty of achieving a certain level o f profit or even a loss
of profitability of the occurrence.3
Bank risk is generated by a variety of operations and procedures, financial matters
requiring a complex approach that risks often interrelated and may have common causes or
may cause chain and ot her risks. He continues to change and evolve in complexity , today
adding to the risks of traditional financial risks , operational risks , strategic risks , country
risks , human risks , fraud risks .4
The conditions of occurrence of risks are deter minated by the manifestation of a
complex of factors that depend on the general evolution of the economy, changes related to
the organization of the bank, taking financial decisions , po litical and economic conditions ,
and producing banking risks resulting fall in profits and income or shareholders , ultimately

1 Paul Halpern, J. Fred Weston, Eugene F. Bringham – “Canadian Managerial Finance”, Harcon t
Brace&Company, Canada, 1994, p. 934
2 Stoian Ion – "Methods and case studies on risk management in business transactions", Oscar Print, Bucharest,
1999, p. 57
3 Roxin Luminița – ”Bank risk management ”, EDP, Bucharest, 1997, p. 11
4 Magazine “Risc Cons ult”, no . 2-3/2002, p. 1

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exiting the business of the bank or by taking them to a stronger b ank , either through
bankruptcy , according to the theory of banking risk typology differing by intensity of action
and consequences that they generate.5

1.2. Special Features of the Banking Risks

One of the most important areas of bank assets and liabilities manag ement is the
management of risk .
We bring his opinion saying that Ion Stoian "risk can be defined as an event doubtful,
but possible, his origins in uncertainty; is derogatory, his effects once products can no longer
be eliminated; occurs during the process of human activity, social, economic, political, and
the relationship between man and nature "thus 8 business success d epends on taking risks
without taking an element of risk, profit can be dropped; by taking several risks, increases
the chance of obtaining a profit.6
Risk management for a bank's management involves studying investment
opportunities monetary and financial markets to bring profits to shareholders and bank
customers , but at the same time reducing the possibilities of loss to an acceptable level .
In general, for all businesses take into account an element of risk, which ensures a
profit potent ial. How a compa ny handles different types of risk and decide how to manage
them is an important criterion in determining the organizational structure of the company
and how to act on the market in dealing with customers and competition.7
Inclination at risk represents a general term meant to measure the tendency of some
people with a higher degree of risk or lower. Attraction towards the risk is determined by a
combination of two main factors: the individual's experience and the natural inclination,
genetics, you assume t he risk or not, as well as obligations to third persons. Managing a bank
when deciding behavior towards certain risks which may occur in the work of the Bank will
take into account its own attitude towards risk, the Bank's experience in the field and their
responsibilities vis -à-vis third parties (clients, shareholders, staff).
Banking risks are considered from two perspectives: the theoretical and th e practical.
When defining risk, most authors focus on the classical function of banks, the financial risk
intermediation within their division . From this point of view , the problem is treated
especially the bank ing assets of unexpected losses, losses from market risks , credit or the
liquidity.
The risk can have a significant impact on the assets of the bank or financial institution
both directly (usually in the form of direct losses incurred ) and a reduced impact cau sed by
the effects on customers, staff , partners and even the banking authority.8
Depending on the perspective from which you make risk analysis, it may be defined
differently. Thus, the linguistic definition of risk-the probability of occurrence of an event
with adverse consequences for the subject. At risk "means the present value of all losses or
additional expenses shall be borne by or they could bear the financial institution concerned.
Thus, credit risk can be defined as a phenomenon that occurs during the course of
banking operations and causing negative effects on the activities concerned by the
deterioration of asset quality , reduced profits o r even losses record with impaired

5 Oprițescu Marin, Manta Iacobescu Alina co ntributor – ”Risk Management and B anking P erformance s”,
Universitaria Publishing House, Craiova, 2006, p. 53
6 Terry Lopez – Risk Management, Bank of Luxemburg, 1996
7 Barry Hoye – Risk M anagement, chapter of Banking Management Coordinator Barry Hoye, R. Răduț, IBR
1998
8 Stoian Ion – ”Methods and Case Studies on Risk Management in Business T ransactions ”, Oscar Print 1999

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functionality bank. Credit risk may be due to internal causes or because competitive banking
environment .
Financial -banking, risk should be viewed as a complex of risks, most often
interrelated, in that it can have common causes or that producing one can generate in the
chain, the emergence of other risks. Thus, Bank risk management should be one of the
components of the global system of Bank management. A good manager in risk issues will
notice and use the way you bank ri sk management interacts with other components of the
system of management of the Bank.
Analyzing the concept of risk we cannot formulate a single definition, but instead ,
we can distinguish three main features:
the causes of the risk coming from under the sign of instability which is carried
out on all processes in the economic life of the country;
the critical point of risk is determined by the objectives of the entrepreneur;
risk represents the possibility that objectives should not be making.
Consequentl y, a risk means the volatility resulting from a wrong choice. In this
instance , the risk occurs depending on a chosen objective (e.g. liquidity risk) and in
connection with the causes of poorly chosen objective (currency risk for example).The risk
may be r egarded as the danger aspect/loss that you/it generates a wrong decision in
opposition to another decision that would have been better. Following a decision by
management to be determined objectives be taken into account: economic (market,
production, prod uctivity, etc.), financial (liquidity, profit, etc.) or social, as well as size. If
the first step, by choosing a wrong objective risk may arise.
In the case of the two steps by choosing a wrong may also manifest risk. On the third
step, even if the corre ct decisions, some circumstantial factors may lead to the occurrence of
the loss and, finally, at the risk. In these circumstances the risk area is relatively extensive in
relation to that of the chance , or, we might say, in relation to the "safety".
In th e hierarchy of additional objectives can be seen an oscillation between the
objective of income and safety. This position differs from investor to investor . Thus, some
promote the objective of income (maximum), while others adopt a prudent attitude,
promot ing the safety (maximum).
Within a company the bank can provide b ank risk management through correct
interpretative policy decisions and policy to ensure the achievement of the respective
revenue forecast, insurance to cover the debts (expenses).
Policy to ensure the achievement of revenue, i.e. the coverage of debt is a result of
"aversion" or "attachment" in relation to risk attitude manifested by the Bank's management.
This position is a key factor in the trend towards attaining a level of safety and is embodied
in banking security policy, of the two aforementioned policies.
Safe banking policy consists in turn of the risk policy and politics to guarantee
reservations. Risk policy provides protection against future income from residuals
(predicted), the o ffense that can reach up to the area of loss.
At the same time, the policy aims to guarantee the development of reserves of
additional precautions measures against these risks, unanticipated additional within the
general policy of risk management.
In tur n, the risk policy aiming at the same objective of avoiding entry into banking
company in the area of loss by limiting the risks, i.e. by eliminating, as far as possible the
risks or by carrying out the strategy risks insignificant. In the case of the vis risk protection,
an important part of the bank guarantees and ensuring the customer by the Bank.
If in the case of organizational measures and those relating to the issuing and
monitoring of credit is envisaged protection against the causes of risk, where other
components of the Bank's risk policy is envisaged protect against the risk e vent . The risk,

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as it is known , is determined by the probability of failure or estimated revenue , said
achieving such potential losses . He can appear i n the form of profit o r failure , ie t he
achievement of actual losses .

1.3. Typology of Banking Risks. New Forms of Expression

1.3.1. General criteria for classifying risks

The banking supervision Committee of the published under the heading "basic
principles for effective ba nking supervision", eight categories of risk: credit risk, country
risk and the transfer market risk, interest rate risk, liquidity risk, operational risk, risk, the
risk of reputation.9
Some risks are new and improved form is due to opera ting through elec tronic systems :
 Operational risk – arising from possible shortcomings in the functioning or
integrity of circuits through which the operations , being more dangerous and difficult to
control when there are not banks' own facilities , but in connections bel onging to clients ;
 The risk security operations -occurs when geographic expansion opportunities and
open access creates unprecedented opportunities for fraud to the detriment of banks and
customers ;
 Reputational risk – the loss of credibility of the bank s affected by a series of events :
the defects produced in installations or electronic thefts substantial accounts.10
Four important categories of risks:
1. Financial risks , which include pure risks ( liquidity risk , credit risk, solvency risk
) and speculati ve risks ( interest rate risk, currency risk, price or market position ) ;
2. Operational risks associated organization and functioning of the bank's internal
systems , including computer systems and other technologies that involve the establishment
by regulato rs of rules that banks must comply ;
3. Risks associated with the busines s environment in which the bank , including
macroeconomic concerns and policy , legal and regulatory factors, as well as the
infrastructure and payment system to the entire financial secto r. This group of risks is often
known as country risk ;
4. Risks for the occurrence of events include all types of exogenous risks which, if
they materialize , could jeopardize a bank's operations or financial condition and could harm
the adequacy of capital t hat banks.
The National Bank of Romania , in its regulations , lists ten categories of risk: credit
risk, information .liquidity risk, interest rate risk, solvency risk , currency risk, counterparty
risk on the assets , the risk of non -compliance with ethical standards , risk management , and
risk.
The risk of interest rate risk called transformation corresponds to a risk of loss or lack
of earnings being tied to interest ra te changes. For example , a bank that grants credit to a
fixed interest ra te of 30 % over a 5 year period , during which the interest rate reaches 35 %,
will face this type of risk . Such a risk can be generated and inappropriate sharing between
fixed rate loans with the variable interest rate , and the bank holding an unfavorable position
compared with the market, in terms of interest rate.

9 Negrea Radu – ”Diversifying the banking risk” , Piața financiară Magazine, no. 9/1998, p. 98
10 Hennie van Greuning, Sonja Brajovic Bratanovic “Analyzing and Managing Banking Risk”, Irecsson,
Bucarest , 2004, p. 12

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Exposure to banking risks
Table no:1.1
Financial Operational Risks of Risks of
risks risks business occurrence
of events

Risks related to Risks of Risks related to Political
balance sheet fraud macroeconomic risk
structure development level
Risks regarding Risks regarding the Monetary Co ntamination
the profitability functioning of the policies risks risk
internal systems
Risks capital Technological Risks relating Risk of banking
adequacy risks to policy makers crisis

Credit risks Management Settlement Exogenous
faulty riks risks risks

Liquidity Risks of failure Infrastructure
risks bank procedures risks
and rules

Market General systemic
risks risk

Source : Opri țescu Marin – ''Managementul financiar al băncilor comerciale '' , page.4

Classification of banking risks
Table no: 1.2
Banking feature Risk group Types of risk
Operating balanc e sheet Financial Credit risk

Liquidity risk

Market risk

Risk of bankruptcy
Banking services Provision Operational risk

Technological risk

Risk of new products

Strategic risk
The a ctivity Environmental Fraud risk

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Economic risk

Competitive risk

Legal risk

Source : Opri țescu Marin – ''Managementul financiar al băncilor comerciale '' , page.4

The risk of exchange rate variation corresponds to a loss driven currencies relative to
the reference currency in which the bank has ex pressed receivables or payables .11
Liquidity risk corresponds to the risk of payment default due to inability to refinance
banks or bank losses related to the difficulty to procure funds under normal conditions in the
money market .12
Country risk ( sovereign risk ) correspond s to the total amou nt of claims , whatever the
nature of the term or on public or private borrowers resident in a country with high risk , or
is the total amount of loans to borrowers residents in a country deemed un -risky , but whose
nationality is that of a country consider ed risky. In general , such a risk can be generated by
a war, a revolution , a change of government, a natural disaster , improper management ,
economic circumstances or unfavorable political or decrease in the price of raw materials .
Strategic risk , know n as political risk and risk management, the corresponding risk
from the absence or existence of any ineffective strategy in one or more sectors of the bank.
The risk of technological dependence occurs when using a techno logy provider
connects its bank .13
A. Classification of risks by nature ambivalent banking institution:
Risks classified according to this criterion are :
 The risk organization . It brings to the fore the issue of quality management.
Management is c onsidered the art of leadership , which involves choosing the manager the
most suitable development strat egies and organizing activities .
 The risk of downtime and risk called a wedge . Is non-material production to the
sound op eration of the banking business . This risk increases with the degree of technic ality
of equipment specific to each unit can act as both bank and intra -bank and inter -bank ;
 Environmental risk of the bank as an economic unit . The Environment " includes
all of the exogenous firm, economic, technical, political , demographic , cultural, scientific,
organizational , legal , psyc hological , educational and ecological marking target setting ,
obtaining necessary resources, adoption and implementation of decisions of their
achievement "
 Risk partnership sometimes referred to as counterparty . It a ppears in bilateral
relations bank – savers or bank – and borrowers resulting from the divergence of interests of
the parties involved. Risks highlighted ac t simultaneously and interfered , their result being
a complex connections cause – effect w ith implic ations in many fields . Obviously , in
practice , the banks' activity is carried out under continuous monitoring of risk , so they can
be minimized exposure to risk and to profit ;
B. Depending on the characteristics bank ing risks can be divided into :
a) Financi al Risks ;
b) Risks of performance ;

11 Cezar Basno, Nicolae Dardac – “Banking Management ”, Economică Publishing House, Bucarest , 2002, p.
11
12 Roxin Luminița, cited work , p. 21
13 Basno C., Dardac N., Floricel C. – ”Banking risks” , Editura Didactică și Pedagogică Publishing House ,
Bucarest , 1999, p. 12

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c) Environmental hazards .
Financial risks – are the most i mportant risks in this category. In fact , to manage
financial risks correctly means a bank to fail gradually,
The main financial risks are :
 Credit risk – is called ins olvency risk borrowers default risk or risk of damage and
the probability that the bank ing quality assets not been cashed effective maturity of the
anticipated revenue s tream from the credit agreement . Reveals the possibility of losses
resulting from breac h by debtors obligations under the credit agreement ;
 The risk of bankruptcy – is called risk capital or debt risk and the probability that
the bank's own funds be insufficient to cov er losses from current activity .
 Liquidity risk – captures the difficulti es they expose and which must overcome a
bank to obtain the necessary resources to cope w ith their commitments at a time . Liquidity
risk is the bank difficulty in procuring the resources needed to m eet their commitments at a
time. Looked at from a certain point of view , the current financial deadlock and arrears could
be interpreted as concrete expressions of liquidity risk. Ensure bank liquidity is a challenge
for bank managers , they should guarantee each time period = passive asset balance ;
 Interest rat e risk – the possibility of lowering it emphasizes b anking income (and
thus profits ) due to the time variation of the rate. Interest rate risk, currency related activity ,
is largely taken up by banks' clients .
This is because the interest on loans and attr acted resources are continuously
changing due t o fluctuating market quotations , except for certificates of d eposit that are on
a fixed rate .
Interes t rate risk has two components :
• income risk , is the risk of losses realized in the net interest income as a result of
the movement of interest rates on borrowings is not well synchronized with the movement
of the interest rates granted;
• investment risk is the risk of further losses in net assets .
Market risk – is its content, a relevant adve rse deviation o f market value ( volatile ) of
a portfolio of positions over the minimum duration required to liquidate the positions , ie
until the risk cancellation . Market risk is caused by the volatility of prices for specific values
that ope- banks on the market.
This aspect is very important trend foreshadowed the price development and
promotion of appropriate measures for the liquidation of unfavorable position because so as
to reduce losses . Volatility is determined by resorting to market parameters such as exchange
rates , stock indexes , etc.
Risks of performance ;
Another classification of banking risks resulting from operations carried out by ba nks
is called performance risks , presenting different forms:
 Operational risk
The probability that the bank becomes incap able of ensuring customer service in a
cost-effective manner ;
 Technological risk
It is associated with quality and structure of the offer of financial products.
The wrong time of removal from the market of a product or to introduction of a new
one, can ge nerate losses and there is always the risk that the timing may not be the most
appropriate in terms of profit maximization ;
 The risk of new product
Is associated innovation in financial products and express the cumulative probability
of occurrence of sever al events : location below the anticipated demand exceeded the level
set of specific costs , lack of profess ionalism of the management team, socio -economic

13
situation , seasonality , etc. This risk refers to the fact that the products offered by a financial
institution can wear out and become competitive ;
 Strategic or business risk
The probability of not choosing the optimal strategy under the circumstances.
Environmental hazards
 The risk of fraud
It is home -grown and the probability of committing thefts or act s contrary to the
interes ts of the bank by its employees . Frau d can affect bank profitability , going to
bankruptcy;
 The risk of human resources
The r isk is the subtlest form , very difficult to measure and is generated by personnel
policy and especially thr ough recruitment, training , motivation and retention of specialists.
This can turn into a specific business risk and can result in staff turnover that
negatively affect the bank's image and contribute to eroding confidence in the strategy
promoted by the b ank;
 Economic risk
Developments associated economic environment in which the ba nk operates and its
customers. It can occur at sectoral , regional , national, international and reduce the
probability of bank performance as a result of adverse developments i n environmental
conditions that affect the quality of investments , volatility risk and potential resources ;
C. Grouping risks by type of risk exposure
Nature of risk exposure d raws attention to its character , which can be objective or
inherent and / or subj ective or additional .
According to this criterion appe ars the following types of risk :
 Risks pure . Characterized in that arising fr om exposure from banking itself , as
potentially lead ing to the loss -causing events . Pure risks are those that arise from cur rent
banking activity every day. These risks may be of several types :
-Physical risks (damage, accidents etc. )
-Financial risks (loss of data, documents, destruction of archives, etc.) ;
-Risks criminal or fraudulent ( fraudulent use of means of payment, cr edit dossiers on
the basis o f false documents, embezzlement , the existence of counterfeit etc. );
-Risks of liability ( non-normative acts, rules , and circulars bank accounts
management errors, misuse of credit grants, etc.) .
 Lucrative or sp eculative risks . They express the exposure it generates efforts made
by banks to get a higher profit , mainly due to aggressive lending policy or losses on the
securities p ortfolio under their volatility . Lucrative risks ( speculative ) arising from the
operations that seek to obtain additional profit ;
D. Risk classification after transfer rate on bank results
In terms of transfer speed on banking costs distinguish:
 Risks quick transfer
Occur within a few months, for example, liquidity risk , interest rate risk variation
and ot hers;
 Risks slow tra nsfer
The damaging effects of which are transferred through the banking cost to incom e
within a precisely determined , for example, the risk of insolvency ;
E. Risks arising from the relationship bank – client
The b ank-client relationship is a mutual respect and exclusive one on one . It must
be regarded both from the point of view of the bank, a s well as the client's position . It can
be said that the bank risks are largely the same company and it risks because t he bank can not

14
exist alone as a stand -alone entity , without having r egard to companies, businesses ,
individuals or legal entities.
Risks arising from relationships between the bank and the company are:
-Risk ignorance or distrust between the two partners. The relevance of this type of
risk arises because the relationship between bank and customer is a relationship based on
mutual trust: trust bank in productive capacities efficient customer and capacity to repay
loans received, and customer confidence that transactions they conduct thro ugh the bank will
be satisfied. This mutual trust is even stronger as bank customers are known, are older, true,
that would maintain cooperative relations safer, with a lower risk;
-Risk succession. Even if the bank has stable relations with a given societ y, and
knowing well the management team and its skills, situations may arise in which the company
management does not meet the bank, thus leading bank risk succession;
-Risk management . Is determined by the quality of the management team of the
company is appreciated by qualification , experience, efficiency in business management ,
quality of relationships with employees and owners , organizational spirit , previous
relationships with banks and other business partners ;
-The r isk of investment in securitie s. He began to unfold with the diversification of
banks permitted activities and may occur in the situation of intermediaries in placements of
securities, performing transactions in own and clients. Banks may risk by purchasing shares
in a company without receiving dividends or their market value fall or by purchasing a
portf olio of bonds that but they can not place on the market.
-Currency risk. With this risk faced by any comp any possessing currency amounts ;
he will suffer a loss if the currency exchange r ate of the resp ective currency market declines .
Meets more frequently if the bank provide s loans in currencies customers , and the exchange
rate of its currency depreciates against the currency, or where they constitute currency
deposits and the time limit, the currency in which they were cast is assessed in relation to
the national currency. These types of risks occur normally in the operations of any bank that
provides loans and carries out operations with currency an d securities;
F. Depending on the marke t that det ermines the occurrence of risk,there are two
categories :
a) Risks due to product market ;
b) Risks due to the capital market .
c) Risks due to product market . This category of risks include s strategic and
operational aspects of the management of revenue and operating expenses . Risks of product
market include:
• Credit risk : the risk is the most important market of the product , it is due t o the
depreciation of the value , as a result of bankruptcy or loan default .
• Risk strategy (business) . The risk that th e whole affair to succumb (die ) due to
competition or obsolescence . One example may be the disappearance of traditional loan
market relative low risk for large corporations, being replaced with c ommercial paper .
• Risk related to banking regulations . Financial institutions operate as profit centers
under licenses that may be revoked , which could lead t o loss of important investments .
Also , another regulatory risk may be withdrawn licenses from the interbank foreign
exchange dealer Romanian sev eral Ro manian and foreign banks .
• Operating risk . Is a significa nt risk product market, it can not be ignored by any
financial institution, and is the risk that computer systems may not work correctly;
• Commodity risk . Commodity prices can sometimes unpredictabl y affect banks
and other lenders , having an overall impact on the economy and on borrowers .

15
• The risk of human resources. The r isk is the subtlest form, very difficult to
measure , result ing in personnel policy: recruitment, training , motivation and reten tion of
specialists.
• Legal r isk. This risk takes two forms , namely:
a) Responsibility creditors when debtors claim that their failure was caused by the
fact that the bank has promised not to withdraw credit or that it will pr ovide additional
appropriatio ns;
b) Litigation binding of toxic wa ste stored on land dispossessed , who initially been
granted loans as collateral. After stripping away this land, by law , must be made larger than
the value of spending to achieve neutralizing the effect of radioac tivity or even ban its
disposal .
• The risk of the product . This refers to the great risk that the products offered by a
financial institution to we ar out and become uncompetitive .
In general, capital markets and risk their value affects all companies, but with
significant financial institutions , where it is difficult to make a clear distinction between the
product and the market risk capital market .
Interest rate risk is the cash flow sensitivity to changes in interest rates.
Liquidity risk is the most important risk capital market and it is that a bank has
adequate liquidity to cover financial obligations at a time . Liquidity risk is highest when a
bank can not anticipate demand for new loans or withdrawals of deposits and had no access
to new sources of liquidi ty.
Currency risk or rate risk arises from ongoing purchase or sale of any currency other
than that outlined in accounting.
Settlement risk is a particular form of risk of e rror, which implies the involv ement of
the bank's competitors . It refers to the tra nsfer of money betwee n local and international
banks . Aces risk is carefully managed through sophisticated tracking technology payments.
Thus, this system performs a singl e payment at the end of the day , instead of innumerable
paym ents by individual transa ctions ;
Basis risk is a variety of interest rate risk . Protection against interest rate , you can use
different combinations of transactions with underlying assets and aim in particular at the
relationship between the unde rlying assets and predictable.
G. Depending on the items affected by the contingency literature differs :
a) Financial risks , liquidity : credit ris k , government securities risk, foreign exchange
risk, interest rate risk, price risk , market liquidity risk , technical risks , organizational ;
b) Risks transactional : transactional risk for sales made in foreign currency
transactional risk for liabilities in foreign currency transactional risk contracts in foreign
currency transactional risk when receiving loans or inve stments in foreign curre ncies ;
H. banking risks according to th eir impact on the balance sheet :
a) Risks related to balance sheet positions : liquidity risk , interest rate risk, foreign
exchange risk , portfolio risk , market risk , country risk , the risk of partner , the risk
settlement risk, profitability , risk indices solvency risk balance sheet structure ;
b ) off -balance sheet risks : forward contracts , credit, futures , options , swaps ;
c ) Other types of risk : the risk o ff trend , risk strategy, production risk , inve stment
risk , competition risk .

16

CHAPTER 2. CASE STUDY ON CREDIT RISK MANAGEMENT ON
THE EXAMPLE OF BRD – GSG

2.1. Credit Risk. Limitations and Restrictions.

Credit risk is limited by severe restrictions aime d at reducing l osses in case of default
events . Before any decision is taken should be specified a limit on the total credits and a
minimum amount of risk with any client or group of clients. Limit borrowers resulti ng from
assessing the situation, such as annual income , property, occupation . Accessing credit lines
must remain under the limit set by the ba nk. To establish certain limits , the basic principles
are simple:
 to avoid a situation where any loss jeopardizes the bank ;
 to diversify its commitments t o various dimensions such as customers , industry ,
and region ;
 to avoid lending any debtor an amount which could increase borrowing capacity
beyond duty.
Capital is another bank that has size limits for loans assumed , given the
diversification of applicat ions and / or lending polic y directions. To support loans , capital
needed performs three functions:
 With the reserve for losses serves as a shock absorber ;
 It is a source of funding ;
 Serves as an indicator for assessing the extent to which the proposed b ank credit
ensures profitability.
Internal rating systems are used in many institutions. These systems classify
borrowers acco rding to their financial status .
A quantitative risk management system, the bank's capital can be allocated to all
credit lines. S uch capital allocation requests special systems for measuring risk at a portfolio
level transactions and limiting bank risk by ensuring strengthened in line with available
capital effectively.14
Credit limit systems are widespread. Sometimes they are not so relevant as they
appear. When the bank runs transactions with a limited number of customers, it is difficult
to set limits, because the loan is based on a continuous relationship. Setting limits and
banking relationships are some interactive processes. Th en large corporations with excellent
credit position are less subject to limits. In other words, "relationship bank" and "name
lending" tend to reduce the importance of the quantitative limits. For individuals, the loan
application process can be simplifie d considerably limit as quality assessment may be based
risk scoring systems often on credit. Scoring estimated the quality of risk as a function of
the limited number of selected features. Limits on credit concentration revealing usually the
maximum permi ssible exposure to a single client group or sector of the economy are
instruments of credit policy preferred by small banks, regional or specialist who will
periodically review these limits.
Banks and other established limits, such as those specifying the types of loans and
other credit instruments that the bank provides or intends to provide clients or maximum
maturity for each type of credit granted.
If we consider that banks need to make money, we can say that they set a price limit
of credit. Interest r ates must be sufficient to cover probable losses and bank charges. On the

14 Nețoiu, L.M., ”Banking Management”, Universitaria Publishing House, Craiova, 2006, p . 159

17
other hand, a certain level of interest rates can be maintained to develop some type of credit
or attract a certain segment of customers. The interest rate charged by the bank on loa ns
provides indirect financing credit risk. Therefore, the minimum interest rate is negotiated
with customers given the option of each bank regarding the method of setting interest rates.
If one takes into account the cost of financing resources, the minim um interest rate must
cover total expenditure (interest paid, overheads, special expenses if the bank accessing
special resources). Determining the level of interest rate depending on the rate and level of
bank solvency rate of return (ROE) ensure complian ce with the required level of solvency
rules and an adequate return on the investments made by the bank.
The magnitude of risk a ssociated with the risk quality , to p rovide a complete picture
of it. Quality Risk covers both probabil ity of default and recove ries (if unpaid) . Usually , she
is surprised by the rating systems .
Internal rating systems are used in many institutions. These systems classify
borrowers acco rding to their financial status . Sometimes , facilities are considered to capture
the protection against the default of the debtor tha t is inserted with the facility . Such
protection can be obtained through s enior debt status or collateral , guarantees or other
contractual agreement (convention) .
The most popular systems are th e rating agencies. For exa mple, Moody ’s uses a
simplified rating scale with 6 levels and d etailed one. Standard and Poor’s using similar
scales .
The ratings are not merely quantitative measurements of quality risk, but some
rankings. Rating systems include the usual 6 to 10 categor ies, sufficient to distinguish
between risk classes. A rating system can also serve as a tool for policy lending. For example,
certain minimum ratings may be required to make a loan or to delegate the power inspector’s
credits. They may allow or not to ent er into transactions based on the rating of the borrower.
A rating system must be relevant. For corporate borrowers, the criteria used to assess the
risk are well known: profitability, growth, industrial outlook, competitive advantages,
management and shar eholders in addition to the standard set of indices.
Rating system configuration differs from one institution to another. Some banks
prefer a rating system with sufficient detail and explicit rules for the assessment criteria and
evaluation. Others are ref lected more on risk assessment amplitude rational guidelines
specifying the criteria to be evaluated before issuing a judgment.

2.2. Methods and techniques for managing credit risk

Assessing bank's exposure to credit risk is the analysis and continuous m onitoring of
a system of indicators can be grouped into three categories:
 Structural indicators
 Dynamic indicators
Indicators relative corre lation with bank capital assets .
Structural indicators (by weight) , expressed as a percentage of bank assets or
structure of the loan portfolio . This category includes the following reports:
-total loans / total assets – the higher the share of loans in total assets is higher by
both banking is perceived to be riskier ;
-average quality loans / total loans – is the indi cator that directly expresses the share
of loans of inferior quality ( in terms of credit risk ) in total loans . Average quality loans
comprise loans in the substandard and doubtful plus observation ;
-credit portfolio losses / total value of the loan port folio:
This report should be as small to express the effe ctive management of credit risk ,

18
This indicator is used to determine the reserves needed to cove r losses in the loan
portfolio.
Dynamic indicators express the time evolution of value indicators who se size is
comparable to the evolution of credit risk .
This category includes indicators :
a) dynamic reserve fund to cover losses in the loan portfolio :
-Expresses how the bank anticipates developm ents in exposure to credit risk ;
-The reserve fund t o further increase provisioning , the bank predicts great er losses in
the loan portfolio ;
-Increasing the reserve fund to cover losses from credit must be analyzed specifically
because it can be used by the bank solely to obtain tax a dvantages and pure in this case , it
no longer reflects an increase in risk exposure ;
-Is an indicator for external use , representing an alarm signal for the banking system
b) dynamic assets and total loans are considered an indicator of credit risk when
recorded accelerated growth .
Indica tors relative correlation of bank assets to capital and other funds that the bank
has provide d information on the relationship between risk exposure and funding so urce of
this exposure . These indicators can be expressed as follows:
-Net profit / losses fro m loan portfolio – the ratio must be greater than one , reflecting
the existence of resources coverings;
-Reserve fund / losses on loan portfolio – higher values than the unity of this indicator
demonst rates a prudent risk management .15
The value and evoluti on of these indicators allow the assessment of the loan portfolio,
but for a more exact analysis is needed related to these indicators. Another model credit risk
assessment can be presented succinc tly by the following indicators , as follows:
 Net loan loss es to total loans ;
 Reserve for loan losses to total loans ;
 Provisions for loan losses to total loans ;
 Term loans compared to total loans ;
 Overdue loans to total loans ;
 Annual growth rate of loans .
In conclusion , monitoring credit risk should be a permanent concern for bank
managers because the study of banking crises in different countries , but also in the
Romanian banking system has demonstrated that the factor most frequently in the
bankruptcy banks was the poor quality of bank assets and in part icular loans.
Bank credit operations based banking prudence of banking policy as a fundamental
principle that characterizes the entire business.
Prudential primarily involves making the credit decision -making should be based on
knowledge and understanding of customers' business . Knowledge of their work client enable
the Bank to provide customer services and products and take adequate measures to reduce
the risk to the recovery of loans and c In determining an acceptable risk -taking and an
acceptable debt , it is very important to understand how this risk can be reduced to the
maximum. This requires a system to investigate all components of risk of lending activity,
which can be divided into four categories:
1. Transaction risk refers to various aspects of fu nctional and operational business
risk ;
2. Credit risk refers to the client's ability to pay its debts to the bank ;

15 Nețoiu, L.M., cited work

19
3. Collateral risk refers to the possibility of the bank to recover its debts from the last
source that is available;
4. Unique credit risk borrowe rs electing interest .
Transaction risk requires identifying, understanding and acceptance of all functional
and operational aspects o f risk involved . It includes :
-nature and structure of the business;
-legal implications , political, economic and pract ical to loans;
-any other circumstances that may affect or change the risk itself.
Transaction risk is very important to know the nature and structure of the proposed
business customer , namely:
-type of credit that is requested ;
-the purpose for which th e product is required credit ;
-time which is granted ;
-the source of loan repayment ;
-the mechanism by which payment is ma de from the source of repayment ;
-quality source of repayment .
In our opinion we say the following example: Bank may grant loans, letters of
guarantee issued or endorsed bills of exchange or promissory notes. In each of these
transactions , same credit risk exists, that the trader entered the bank be unable to pay in
relation to that term.
The difference between the business that ha s banks is reflected in the type of
transaction, meaning that if credit issuing bank funds is done immediately or within a very
short, and if the issuance of letters of guarantee or endorsements, release of funds become
effective at a future date and only if the customer has not complied with its obligations under
the bank guarantee requested.
Regardless of the transaction , you wish to conduct involving bank and credit risk
should be identified in advance, using the investigative method, all components tha t
determine risk. Thus, should be investigated, analyzed and known sources and terms of
reimbursement, contractual rights and obligations of the client and its debtors, nature, value
and the liquidity of each customer warranties.
Quality source of repaymen t is a major component in knowledge and measurement
of risk. It is preferable for the bank to enter into transactions in which the source of
repayment is identifiable because its quality can be analyzed and monitored customer
mechanism by which borrowers m ake payments.
For example, if loan documents , loan repayment source is identifiable and can at the
same time be measured and monitored quality payment method, the credit risk can thus be
determined. It's another situation where a working capital loan where the repayment source
is unidentifiable, it can be found in the results of the total business customer, each claim
having another degree of liquidity and another payment mechanism . In conclusion, to
minimize the risk assumed by the bank loan officer, depen ding on the financial performance
of the client, the client must propose a product which involve s less risk as the bank. Credits
are preferred object of working capital precisely because the risk can be identified,
monitored and measured.
In terms of credi t risk involved transactions bet ween the bank and its customers , risk
limits related transact ions are classified as follows:
Category I-transactions are credit risk 0. This includes all transactions are secured by
collateral deposits ; guarantees issued b y the Romanian government or other governments of
category A; guarantees by banks of category A;

20
Category II – credit risk transactions are 100 % . In this category are all commercial
transactions both short term and the medium and long term , they are sec ured by collateral
other than those mentioned under Category I, like mortgages, pledges , etc .;
Category III – only for bank transactions with other banking companies
Category IV – include foreign exchange transactions (spot and forward) ;
Category V – safekeeping , shall not be used for commercial customers .
Credit risk invo lves the assumption by the bank , the risk that the due date the
customer will be able to pay its obligations . The loan is from the perspective of the bank, an
investment with a know n risk and assumed to obtain a profit, and in terms of customer
required a funding source deployment, continuation, development , and restructuring
activity.
Credit risk arises in the form of losses arising from breach of contract by the debtor
, by waiving the psychological motivation of mutual trust. It appears as damage by delaying
payment of debt service or interest rates . It is interesting to look Cancellation little shade
mutual trust because that is the debtor to violate his promise to end the initia l credit
agreement.
What makes the parties involved in the contractual relationship of credit to cooperate
to achieve the interests distinct ly is the price system that is used in th is case , bring the interest
rate that meets mainly three functions:
– transmission of information to the borrower on its financial costs it must compare financial
expenses increased selling price of the products in different markets ;
– boosting debtor organization of production i n a less costly manner possible , first mobilizin g
available resources , including those borrowed for pro ducts of the highest quality ;
– allocation of income , meaning that the debtor seeks permanent as the result of his work is
distributed by the interest paid to the lender and , of course , but it remains .
Distractions that can lead to this risk, the concept of the debtor, belonging to the
organization creditor, such as management and strategy flawed in the area of financing, the
losses of previous financial years of the financing bank are thrown on the selling price of the
financial resources placed in the business of the debtor new contractor. Such a process
creates at the beginning of the relationship, the premise of default by a manifest inability of
policy makers to restructure the management of the loan portfolio quality and requires the
reintroduction of the relationship of mutual trust with a new negotiation.
Credit risk through its extreme form, causing losses financing bank, in this case, the
losses are final. External disturbing factors, specific credit agreement, which determines
coerced broken promises, lies in that organization called state policy, which tends to interfere
with the free relationship of the parties. An example is to be found in the monetary anti –
inflationary adopted by t he Central Bank entity of the state, which sets raising the required
reserve ratio, the motivated global need for inhibition credit by blocking necessary financial
resources to the company bank account at Bank central.
To not get to situations where custom ers can not repay loans , the bank uses in its
lending policy and restrictions, designed to elim inate the risk of this activity . Among them
is the most important decis ion not to grant credit :
– Economic mismanageme nt with no prospect of recovery ;
– Trad ers who contribute equity to finance current assets or investments;
– Entities under reorganization or liquidation.
Also in the evaluation phase of t he loan portfolio may determine , by sector , the share
of loans weaknesses in total loans at the bank, the share of losses from loans to these
industries and customer categories in total loans granted by the bank , the share of provisions
in total loans etc.
Warranty Risk management involves two levels of analysis :

21
a) The first level is that of quantifying th e amount of collateral before granting credit i n
deve loping a lending decision .
The way in which the security is directly or indirectly to the customer from a third party that
guarantees to it, involve different forms of identification and risk awareness. Bank guarantor
for quality is as important as the quality guaranteed customer , the bank thus assuming the
risk to the customer equal to that of credit that directly benefit ;
b) the second level of security risk analysis refers to when the collateral liq uidation if the
bank wil l have to proceed to execution.
The risk of lending small borrowers, according to one debtor Banking Act is "any
person or group of persons and / or legal entities with which the bank has an exposure that
is economically linked to each other in the sense that:
-One per son exercises over the other,
-Directly or indirectly,
-Power of control;
The cumulative loans represent a single credit risk for the bank because people are
linked in such a way that if some of them will face re payment difficulties, the other or others
will encounter similar difficulties. For these people wil l consider, but not limited to, the
following situations:
-are linked to the same person;
-the same management;
-cross guarantees;
-direct commerci al interdependenc e which cannot be substituted in the short term.
In accordance with the legislation in force is determined how to regulate credit borrowers
unique, as follows:
*Loans to a single borrower do not exceed 20 % of the bank's own funds;
*The total amount of large loans cannot exceed 8 times the bank's own funds.

Borrowers may be unique:
 autonomous ,
 companies,
 groups ( holdings) ;
Identification of the bank debtors is unique:
a) After the organization and operation of the utility :
 Regulation of organization and operation of the utility ;
 The status of association and company;
After consulting the documentation establishing the customer can obtain useful
information about:
 Legal status (company and type, direction, group, etc. ) ;
 The structure and nature of capital subscribed and paid up;
 The name and quality of shareholders;
 Organizational structure of the customer ( self -contained , with subordinate units )
;
 Duties units ;
 Nature of capital ( public heritage , social heritage ) ;
b) by checking accounting documents summary :
 trial balance ,
 balance sheet
 profit
 loss account ;

22
Due to specific links between different customers, difficulties one may bring
difficulties and others. Depending on the nature of links between customers , which is the
sole obligor shall conduct such analysis to enable decision making based on real knowledge
and risk -taking by the bank.
This risk should be pursued in the following aspects:
– for indivi duals and companies :
 bank's risk exposure is given to th e total overhead or company that is a single
borrower ;
 credit essay should contain information about the client's financial commitments and
single debtor ;
 loan guarantee to be provided by the director or company , holder heritage , directly
or thro ugh subordinate unit empowerment ;
– for groups :
 bank's risk exposure is given to the overall group , which constitutes the single
borrower ;
 credit essay must contain financial information about the client group.
 the risk that is incurred by the b ank but he has total exposure to single borrowers .

2.3. Trends and Perspectives in Managing Credit Risk in the Banking Sector
in Romania. The Impact of the International Financial Crisis

The NBR continued to actively support the sustainable resumption o f lending to the
real sector by resorting to monetary policy instr uments. The signals sent to the banking sector
resulted in increased local currency -denominated financing flows at historically low-interest
rates.
The prudential measures on foreign curren cy lending led to the steady decline in the
stock of foreign currency -denominated loans, which helped mitigate the vulnerabilities in
banks’ balance sheets. The NBR’s recommendations on banks’ balance sheet clean -up
translated into the marked decline in th e NPL ratio, which provides a sustainable basis for
the resumption of lending to the economy. The high coverage by IFRS -compliant
adjustments for impairment is an important factor to reduce credit risk. Potential unexpected
losses that may arise from credi t risk becoming manifest can be covered by the substantial
capital reserves of credit institutions.
In 2014, the loan stock saw a decline , mainly a s a result of banks’ efforts to clean up
their balance sheets by removing the c arrying amount of unrecoverabl e loans fully or partly
covered by adjustments for impairment . In the current year, lendin g to the real sector
increased , amid the narro wing of the negative output gap and the strengthening of the
domestic macroeconom ic environment. The supply -side factors restricting the flow of loans
to the econom y are further the balance sheet adjustment to the prudential capital adequacy
and li quidity requirements imposed by the CRD IV/CRR regulatory framework, as well as
a caut ious lending stance against the background of an insufficien tly identified eligible
demand. The NBR continued to support the sustainable resumption of lending to the real .
The sector, by resorting to monetary policy instruments:
a) the policy rate was cut by 175 basis points during the period unde r review (from
3.5 percent in June 2014 to 1.75 percent in June 2015), as a signal for commercial banks to
reduce the cost of leu-denominated loans along with the improvement in the domestic
macroeconomic environment;
b) the minimum reserve requirements r atio on leu -denominated liabilities of credit
institutions was gradually cut from 12 percent to 8 percent, while that on foreign -currency

23
denominated liabilities was lowered from 18 percent to 14 percent, with a view to increasing
the volume of resources a vailable for lending to the real economy.
In 2014 and 2015 , the banking sector saw a fast -paced balance sheet clean -up that was aimed
at supporting the sustainable resumption of lending to th e real sector. The NBR required
credit institutions to develop a ccounting policies concerning the removal from the balance
sheet of the carrying amount of unrecoverable loans fully or partly covered w ith adjustments
for impairment . In accordance with the N BR’s recommendations, credit institutions’
accounting policies s hould comply with the generally accepted banking practices, the
Internationa l Financial Reporting Standards (IFRS) and the professional judgment, the
approval of external auditors being mandatory. The balance sheet clean -up was the result of
operations to remove from the balance sheet the carrying amount of unrecoverable loans
fully or partly covered with adjustments for impairment.

Non-performing loans at aggregate level (national definition and EBA definition)16

Graph no:2.1

Source: N ational Bank of Romania (NBR)

The volume of non-performing loans decreased si gnificantly , which pushed the NPL
ratio down to 12.8 percent in June 2015, from 19.2 per cent in June 2014 .In 2014, credit
institutions carried out non -perform ing loan sales in the amount of lei 8.9 billion. The NPL
coverag e by IFRS provisions rem ains high (69.0 percent in June 2015, similar to the level
recorded in December 201 4, but higher than that seen in June 2014, 68.4 percent). Starting
with September 2014, the Implementing Tec hnical Standards on supervisory reporting on
forbearance activities and non -perfor ming exposures developed by the EBA have become
applicable. The technical standards provide a uniform definition for the assessment of non –
performance of financial assets, as determined by the “ nonperforming exposur e ratio”, the
methodology being applicable in all EU Member States on a consolidated basis.
These standards are aimed at providing competent authorities with the additional
instruments for assessing the level of forbearance activities and non -performing e xposures,
comparable at EU level, in the context , of uncertainties surrounding the quality of bank
assets, as well as of the inconsistent national practices for assessing asset quality, especially
those regarding the scope of the non -performing asset class .

16 Non-performing loans at aggregate level (national definition and EBA definition)

24
According to the EBA definition, the non -performing exposure ratio calculated for
the Romanian banking sector, based on individual reports, stood at 16.57 percent in
September 2014 and posted a downward trend in 2015 (to 12.7 percent in June 2015). The
NPL coverage by IFRS provisions was relatively stable in the reviewed period (about 55
percent).
Asset quality is still a vulnerability in many EU countries . The large stock of non –
performing assets continues to affect banks’ capacity to simultaneously buil d up additional
capital buffers and secure the flow of loans to the real economy, which generates systemic
consequences . The NPL ratio reported by 50 percent of the significant banking groups in the
euro area further exceed 10 percent (one of the causes co nsisting in the difficulties faced
during the balance sheet clean -up process).

Loan portfolio quality in selected EU Member States
Graph no 2.2

Source: IMF and NBR17

Coverage of non -performing loans in selected EU Member States
Graph no 2.3

Source: IMF and NBR18

Potential unexpected losses that may be generated b y credit risk becoming ma nifest
can be covered by the substantial capital reserves of credit institutions in Romania (which
accounted for about 10 percent of total risk exposure amount in 201 5).

17 Loan portfolio quality in selected EU Member States
18 Coverage of non -performing loans in selected EU Member States

25
2.4. Methods of Managing Credit Risk at BRD – GSG

BRD – Groupe Société Générale (the “Bank” or “BRD”) is a joint stock c ompany
incorporated in Romania. The Bank commenced business as a state-owned credit institution
in 1990 by acquiring assets and li abilities of the former Banca de Investitii. The Bank
headquarters and registered office is 1 -7 Ion Mihalache Blvd, Bucharest.
BRD together with its subsidiaries (the “Group’) offers a wide range of banking and
financial services to corporates and individu als, as allowed by law. The Group accepts
deposits from the public and grants loans and leases, carries out funds transfer in Romania
and abroad, exchanges currencies and provides other financial services for its commercial
and retail customers.
The ultima te parent is Société Générale S.A. (the “Parent”or “SG”). The Bank has
860 units throughout the co untry (December 31, 2013: 883). The average number of
employees of the Group dur ing 2014 was 8,245 and the number of employees of the Group
as of the year -end was 8, 271 (December 31, 2013: 8,300). The average number of employees
of the Bank dur ing 2014 was 7,690 and the number of employees of the Bank as of the year –
end was 7,693 (December 31, 20 13: 7,754). BRD offers a range of banking and financial
services to individuals and legal entities under the law.
The Bank accepts deposits and provides loans and leases, carries out funds transfer
in Romania and abroad, providing currency exchange services and other financial services
to individual customers and busin esses. The universal bank BRD – GSG has proved such
qualities in a market environment heavily damaged. Although the banking sector suffered in
2009 from the sharp rise in risk costs, prudent policy of BRD did it to remain below the
average system at a per fectly manageable.
In order to make a correct analysis of how that evolves over time the quality of the
loan portfolio, the impact on profitability, capital adequacy and customer confidence in the
bank, banks calculated the credit risk indicators in the following categories:
-the volume of overdue loans / total loans x 100: it is desirable that the report will
tend to zero;
– the volume of non -performing loans / total loans x 100: optimal value is minimal
because nonperforming loans secured on bank activit y and financial results of the fund
generating problems of the banking system;
-reserves for loan losses / total loans x 100: an indicator that expres ses management's
expectations regarding the evolution of the bank's loan portfolio quality;
-provision for loan losses / net loss x 100: indicator reflecting the cautious policy
adopted by banks in lending;
-gross profit / provision for credit losses x 100 and the cost of the bank in terms of
credit risk cover.
We intend to make an analysis of the credit risk faced by the bank BRD – GSG system
based on indicators used by the bank. But before starting the analysis, we consider important
to make some theoretical on strategies and methods used by the bank in managing credit
risk. In this regard, the bank's strateg y BRD – GSG implementation of Basel II provides for
the adoption of a standardized method for credit risk in January 2011. Regarding the banking
risk management procedures used by banks, ie credit risk, we will briefly present some issues
that we believe a re most important.
Significant risk management process is focused on analyzing the risk profile in order
to maximize the ratio of profit and risk in various activities within the bank.
Policies and procedures related to lending and credit risk are establis hed and
implemented according to assigned roles and responsibilities so as to ensure the following:
– Maintaining healthy credit standards;

26
– Monitoring and control credit risk;
– Appropriate assessment of new business opportunities;
– Identifying and mana ging problem credits.
Entities involved in lending and provides monitoring of credit risk management at
the level of each credit facility and the aggregate, the entire portfolio, credit risk elements of
nature being analyzed in relation to other types of r isks which is a close relationship of
interdependence, with consideration to the following main coordinates:
– Concentration of credit;
– Counterparty risks;
– The s ystem of credit scoring / rating.
Establish criteria for granting credit it is healthy and well-defined an essential
principle in lending. The Bank has a well-defined process for approval, he carried on wit h
the principle of "four eyes". Segregation of duties ensures independence between the
personnel responsible for managing relationships with customers, who approve the loans
and performing hiring and monitoring repayments over the life of the loan.
Credit approval process is centralized.
At all levels of approval required unanimous approval of the members of the
respective committees. In order to limit credit risk and lending policies of the bank , staff
determined that the personnel involved in lending to experience appropriate to the size and
complexity of the operations to be carried out.
Next, we make assessments based on indicators calculat ed on credit risk to the bank
BRD – GSG. The share of overdue loans and NPL ratio should be as small to express the
effective management of credit risk. This measurement is used to show the risk analyst the
necessary reserves to cover losses from loan portfolio.

Tabl e no. 2.3
Years 2013 2014 2015
Overdue loans 4050634 3710118 3110465
Total loans 33853403 31302885 30744036
Share of overdue
loans in total loans 11.96 % 11.85% 10.11 %
Non-performing
loans 77721 41320 58001
Total loans 33853403 31302885 30744036
NPL ratio 0.22% 0.13% 0.18%
Reserves for loan
losses 5794226 4525 771 3998 569
Total loans 33853403 31302885 30744036
Loan loss reserves
ratio 17.11% 14.45% 13.00%
Source: Own calculations based on information from the annual reports of the bank

As regar ds the overall dynamics of the reserve fund to cover losses in its loan
portfolio, it expresses how the bank expects credit risk exposure developments. If there is an
increase of the reserve fund for provisioning, this is due to projections compiled by the bank
that the combined portfolio credit losses will be large. At the same time, the indicator is
mainly an indicator analyzed for external use, representing an alarm signal for the whole
banking system.
The analys is of data presented in table 2.3 is reflecting a downward trend in 2013 –
2015 for the three indicators. Management of non -performing loans has become in recent

27
years one o f the main challenges of banks. The down ward trend was influenced by the active
measures taken by the bank to reduce the volume of the nonperforming loans by write -offs.
In the period 2013 -2014 the NPL ratio continued to decrease , including episodes under
pressure to depre ciate the leu against the euro. In 2014 there is a noticeable improvement in
this ratio , the level being 0.13%.
The bank managed to reduce the NPL ratio mainly due to the implementation of an
active policy of removal and sale of receivables, while improving coverage provisioning of
bad loans (from 69% at the end of 2013 to 71% in late 2014). The net cost of risk decre ased
by 43% compared to 2013 with positive developments in both segments, companies and
individuals.

Risk management
Risk management within the Group and Bank is based on an integrated concept that
takes into account the statutory and regulatory norms a s defined and required by the National
Bank of Romania as well as Société Générale risk management standards. The level of risk
appetite fully reflects the Group’s and Bank’s risk management strategy, aiming to support
a sustainable growth of its lending a ctivities while reinforcing the Group’s market positions.
Risks are managed within a continuous process of identification, assessment, control
and reporting, considering risk limits, approval competences, segregation of duties and other
mitigation techn iques. Throughout 2015, BRD continued its efforts to accurately assess risks
in a difficult and rapidly changing business environment, along the dimensions defined in
2014.
Risk management governance relies on the three lines of defense model, which
reinforces segregation of duties between various control functions. The first line of defense
is represented by the permanent supervision, performed at the level of each business unit;
the business units are responsible for defining and continuously adapting the specific control
and risk prevention environment, as part of daily activities. The second line of defense is
represented by the functions overseeing risks (risk management, compliance), which provide
support to the business/operational functions in exe cuting their duties. The third line of
defense is represented by the independent assurance provided by internal audit.
The Group and Bank’s risk management governance is centered along the following
axes:
• strong managerial involvement in the risk man agement system and promotion of
risk culture, throughout the entire organizational structure, from the Board of Directors down
to operational teams;
• clearly defined internal rules and procedures;
• continuous supervision by an independent body to monit or risks and to enforce
rules and procedures.
The Group and Bank’s risk management is organized around two key principles:
• risk assessment departments must be independent of the business divisions;
• the risk management approach and risk monitoring m ust be consistent throughout
the Group and Bank.
The Group and Bank’s is exposed to the risks inherent in its core businesses. The
main financial assets and liabilities are the loans and advances, lease receivables, amounts
placed with NBR, demand and te rm deposits and borrowings. These instruments are exposed
to a series of risks such as credit risk, foreign exchange risk, interest rate risk, liquidity risk
and market risk which are discussed below.

Credit risk

28
Credit risk represents the loss which t he Group and Bank would suffer if a client or
counterparty fails to meet its contractual obligations.
The credit risk is inherent to traditional banking products (loans, commitments to
lend and other contingent liabilities such as letters of credit and fa ir value derivative
contracts.
The Group and Bank’s credit policy is based on the principle that approval of any
credit risk undertaking must rely on a sound knowledge of a given client and its business, an
understanding of the purpose and structure of the transaction and the sources of debt
repayment.
As part of Group Société Générale, the Bank has a cash flow based lending approach,
meaning the bank expects debt to be serviced primarily through the future cash flow (legal
entities)/ income (individuals) g enerated by the client.
The Group and Bank assess the quality of its non-retail portfolio by use of Société
Générale’s rating system, with a scale from 1 to 10 (1 to 7 – in bonus exposures, 8 to 10 –
defaulted exposures).
The internal rating system is based on models that include both quantitative and
qualitative assessment criteria, differentiated by counterparty type and size, in which the
expert judgment is a key element.
Internal models are developed based on the Group and Bank’s available data his tory.
The use of rating model is regulated by i nternal norms and procedures. Rating review
is performed at least once per year, or as soon as new and significant aspects impacting the
credit quality of the counterparty occurs.
This process results in the classification of exposures between standard, sensitive and non-
performing client status.
Retail counterparties are assessed at origination, based on application scorecards and
/ or behavioral rating models, and monitored throughout the lifespan of the l oans u sing
behavioral rating models.
Security, in the form of collateral (funded protection) or guarantee (unfunded
protection), is accepted to mitigate credit risk and do not serve as a substitute for the
borrower’s ability to meet obligations.
The secur ities accepted in support of granted commitments primarily include real
estate, both residential and commercial, guarantees issued by other banks and guarantee
funds, equipment and inventories.
The Group and Bank quantifies the level of credit risk conce ntration it undertakes by
setting and strictly monitoring limits on the amount of risk accepted in relation to one
borrower, or groups of borrowers, to industry segments, to geographical regions, to BRD
Groups, to product / transaction type and single prot ection provider (cred it risk mitigations
techniques).

Maximum exposure to credit risk before considering any collaterals or guarantees

Table no. 2.4 Bank
Assets December 31, 2015 December 31, 2014
Due f rom Central Bank 7,480,319 5,832,421
Due from banks 2,287,837 1,236,048
Derivatives and other
financial instruments held for
trading 1,218,133 693,905
Loans gross 30,312,244 30,926,607

29
Impairment allowance for
loans (3,935,819) (4,465,398)
Loans and advances to
customers 26,376,425 26,461,209
Financial assets available for
sale 9,190,919 8,201,911
Other assets 47,755 44,146
Total assets 46,601,387 42,469,640
Letters of guarantee granted 6,240,636 6,474,605
Financing commitments
granted 4,082,382 3,991,348
Total commitments granted 10,323,018 10,465,953
Total credit risks exposure 56,924,405 52,935,593
Source: Annual reports of the bank

The breakdown by the rating of the Group and Bank’s banking counterparties
exposures is based on an internal counterparty rating system. The definitions are presented
below:
-Very Good – The counterparty is considered to be very reliable. The capacity to
meet interest payments and capital repayments is very strong.
-Good –The counterparty is judged to be of good quality. Capacity to meet interest
and principal repayment is strong but counterparty is somewhat more sensitive to adverse
changes in circumstances and economic conditions.
-Rather Good – Counterparty has an average solvency. Ability to pay interest and
capital is still sufficient, but more likely to be undermined by unfavorable economic
conditions and changes in circumstances.
-Sensitive – Counterparty exhibits a fairly high risk, especially over the long term.
Timely repayment of capital and interest is uncertain and depends on favorable economic
and financial conditions. Close monitoring the client’s capacity to service the bank debt is
needed, in order to be able to react to a potential deterioration via implementation of
corrective measures .

Table no. 2.5 Rating of the Bank
December 31,
2015 December 31,
2014
Very good 2,040,451 1,133,476
Good 16,055 48,224
Rather good 220,980 36,003
Not rated 10,351 18,345
Total 2 ,287,837 1,236,048
Source: Annual reports of the bank

Table no. 2.6 Sector analysis of loans individually impaired
December 31,
2015 December 31,
2014
Individuals 1,255,343 1,374,763
Public administration, education & health 46,344 58,724
Agriculture 147,303 141,459

30
Manufacturin g 761,670 1,007,603
Transportation, IT&C and other services 230,194 305,252
Trade 1,349,752 1,655,921
Constructions 709,188 945,155
Utilities 97,763 104,100
Services 211,831 225,405
Others 345,894 460,295
Financial institutions 13,960 12,331
Total 5,169,242 6,291,007
Source: Annual reports of the bank

In conclusion, the analyzed bank succeeded in managing its loan portfolios by
improving year by year its own credit risk indicators . Although in the period 2011 -2013,
BRD recorded losses, it is observed that due to efforts to reduce the rate of bad loans through
a process of removal and sale of certain loan portfolios, in 20 14, the bank returned to profit .

31
CONCLUSIONS

Avoiding and minimizing risk is achieved by making decisions and finding legal
techniques as consistent. Minimizing risks borne by the bank helps minimize losses for the
bank and maximizing profitability .
For mitigation the risks , the bank units must perform financial analysis of the client
which requires working capital cycle analysis , analysis of performance indicators, analysis
indebtedness , and liqu idity analysis of the claimant company .
Avoiding credit risk can be taken directly from the management level. So if board
members shall always respect the commitments provides quality information and reliable
help to maintain relationships , experience , and professional qualities good , are good
visionaries, performs excellent con trol, takes no unnecessary risks and have a good market
reputation then the risk is very low and easily avoided.
Regarding the objective of mitigating risk in the work carried out banking experience
requires strict implemen tation and effective ways to mitigate generalization, but first , the
prevention of risk.
In conclusion , this approach to credit risk management of bank portfolios is taking
into account the following:
– Certain combinations risk – reward is not effective: they are dominated by others,
either because they provide higher income for the same risk or that offer less risk with the
same income.
– Individual transactions dominate the portfolios of individual transactions through
the account diversification b enefits realization. Therefore , there are portfolios for which risk
– reward combinations dominate all others. They are considered efficient portfolios . This set
of efficient portfolios is due to improved transaction weights . These portfolios are spread
along the curve called "efficient frontier" .
– Correlations is a basic input for det ermining risk- reward profile .
As for the analyzed bank, risk management within the Group and Bank is based on
an integrated concept that takes into account the statutory and regulatory norms a s defined
and required by the National Bank of Romania as well as Société Générale risk management
standards. The level of risk appetite fully reflects the Group’s and Bank’s risk management
strategy, aiming to support a sustainable growth of its lending a ctivities while reinforcing
the Group’s market positions.
Risks are managed within a continuous process of identification, assessment, control
and reporting, considering risk limits, approval competences, segregation of duties and other
mitigation techn iques. Throughout 2015, BRD continued its efforts to accurately assess risks
in a difficult and rapidly changing business environment, along the dimensions defined in
2014.

32
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