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Several factors intensifying credit risk

Feb 26, 2013 Walt Wojciechowski

Credit risk management has been an extremely difficult task in recent years, especially as the nation's financial situation continues to fluctuate at an unpredictable and rapid rate. Enterprise executives and investors need to ensure they have the full story of every potential deal before either taking out loans, issuing credit or beginning to do business with other entities.

Individuals who do not feel entirely comfortable with the credit risk management process should consider using a third-party vendor of associated services to maintain strong financial performances despite fluctuations in the market. While the economy continues to rebound, businesses and investors that excel with credit risk management will often be strongest.

Another switch
Bloomberg recently reported that the Markit CDX North American Investment Grade Index increased again, rising 1 basis point. The index is based on the volume of credit-default swaps in the U.S. investment market, which is often a solid indicator of economic wellness among the nation's largest enterprises and investors.

According to the news provider, the G-20 summit, which is currently meeting in Moscow, Russia, might be impeding stronger financial performances. The source explained that finance ministers from G-20 nations are working to come to terms regarding currencies, which has been a major point of contention in recent years.

Bloomberg explained that investors are keeping a close eye on the decisions made during this summit, as it will be crucial in determining the future currencies such as the Japanese yen and Chinese yuan. These two currencies, along with the euro, are among the most important when it comes to the financial performances and decision-making of U.S. investors. 

Finally, the news provider explained that the index's fall is often an indication that investor confidence has fallen, and that this may lead to less availability of commercial and personal loans for U.S. entities. 

Impact of student loans
Several studies have indicated that the growing student debt crisis in the United States is creating even further strain on credit risk management. U.S. News and World Report recently explained that student debt has skyrocketed throughout the past several years, and as such has outpaced virtually every other form of outstanding credit in a relatively short period of time.

According to the news provider, one credit analysis firm found that the risk of delinquency for existing loans has increased substantially in the past decade, which the threat of default for new loans has remained constant. The research indicated that from 2005 to 2012, delinquency rates of existing student loans increased from 17 percent to 47 percent. 

This has caused several negative reverberations in other market segments, especially those related to any form of lending, as financial institutions and investors have had to tighten their lending terms and decrease loan disbursement volumes. The source added that this has made it more difficult to judge risk, even for the most upstanding credit reporting agencies. 

For example, as credit risk is often judged by complex algorithms, a worsening financial situation and increasing outstanding debts forces reporting agencies to change the equations they use, while this can sometimes happen too late. U.S. News and World Report explained that all signs indicate that the student debt crisis might lead to serious implications for far-reaching market segments in the coming years.

Safeguarding financial performances
Enterprise decision-makers should always keep a close eye on credit risk in the United States and other economically intertwined nations, as this will lead to a clearer perspective regarding financial choices. By consistently focusing on all markets that could have implications to corporate operations, financial decision-makers and investors can keep their companies safe from future economic issues.