Accounting for the future: Credit risk management in banking

Abstract

Purpose This paper examines how credit risk management accounts for the future through a quantification process where models and executive judgement blend together.
Design/methodology/approach The paper is based on a case study approach with interviews as the primary data source. The case company is a systemically important financial institution located in Scandinavia.
Findings We study how the bank quantifies credit risk through commensuration to fulfil legal and internal purposes. Specifically, we show how the models used to quantify corporate credit risk are considered useful in lowering capital requirements while also encouraging uniform reporting that will standardise information and advance decision-making. Further, we show how the monetary output of models is supplemented with executive judgement to account for uncertainties in future corporate credit risk.
Originality The paper demonstrates how a quantification process evolves as a result of the interrelated demands for external and internal control and how risk models integrate with subjective evaluation.