An assesment and management of credit risk in Baltic states’ banks

Abstract

Recently rapid development of the Baltic States was evidently influenced by the increase of lending rate. In such conditions especially actual is the evaluation of the banks‘ credit risk and the commercial banks stability.

The aim of the research is to examine the aspects of assessment and management of the credit risk in the Baltic commercial banks.

Management of the credit risk is a keystone of risk management in the banking area. Finance institutions have to be able to govern the credit risk at the level of whole lending base as well as at the level of individual borrowers and concrete credit form.

Modern credit risk management theory establishes four credit risk dimensions that define the credit risk value:

1. Probability of Default – disability of the borrower to meet his engagements; the probability of borrower‘s insolvency during the contract period;
2. Exposure at Default;
3. Loss Given Default;
4. Maturity – the time left until debt coverage.

The change for the worse of the macroeconomic situation in the Baltic States (economic development quick rise, growth of the unemployment level, still high inflation level) influenced the borrowers‘ insolvency negatively. Quick fall of the lending base quality could be observed especially well in the Latvian commercial banks.