Elements of the Credit Decision
As we have seen above, exposure to a given counterparty will not be incurred if an institution elects not to transact business. If, however, a decision to transact is taken, management of the exposure becomes a necessity. In order for a bank to arrive at the decision of whether or not to transact, it must consider a series of factors: counterparty credit quality, risk, return, maturity, motivation and enhancement. In considering these elements, the bank will arrive at a decision; we term this the credit decision. If affirmative, the decision will commit a bank to a given transaction in a certain structure; if negative, it will avoid commitment to the transaction.
KeywordsCredit Spread Credit Quality Hurdle Rate Counterparty Risk West Texas Intermediate
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