Measuring Provisions for Collateralized Retail Lending

While banks have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be related directly to lax credit standards for borrowers, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank’s counterparties. In view of this experience, the Basel Committee on Banking Supervision (2000) sets out the sound practices which specifically address establishing an appropriate credit risk environment and maintaining an appropriate credit administration, measurement and monitoring process. These practices should also be applied in conjunction with a system in place for determining the adequacy of provisions.