Understanding of Credit Risk

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1. Credit risk
* Credit risk is the risk of financial loss linked to a counterparty not meeting their financial obligations and a decrease in the counterparty’s credit quality, which results in a financial loss (ANZ, 2020). Australia and New Zealand Banking Group (ANZ) has a low credit risk level reflects, and the economic situation can affect the bank’s financial status. Accordingly, the institution has adopted credit principles and policies that cover the full credit life cycle. As part of credit risk management, there is also evaluation and continuous monitoring of credit risk exposure. Credit risk is measured through the expected loss and depends on the probability of default, exposure to default, and the default loss for the group when the borrowers default on their obligation. Clients and customers are expected to honor their obligations fully and in a timely manner including the principal payments, collateral, interest payments, and receivables. Macroeconomic and financial conditions have a direct impact on the risk of default such as the economic conditions worsen it is more likely that the credit risk will increase. However, ANZ undertakes continuous monitoring of clients' and customers' risk appetites for both individuals and companies. The group’s activities involve payment commitments that the counterparties are to fulfill their financial obligations based on contracts.
* The COVID-19 pandemic has disrupted ANZ‘s customers, clients, and suppliers while increasing the default risk because of growing unemployment and slow growth. The pandemic had a negative impact on the economy there was increased credit risk and uncertainties affecting the ability of counterparties fulfilling their financial obligations. There were expectations that there would be higher credit losses associated with debt instruments, and there is a need to reevaluate the impairment of trade and other receivables. Rising unemployment and uncertainties linked to the pandemic increased the risk of defaults and the businesses were exposed to an unusual situation similar to an economic shock. Despite a difficult year in 2020 and in 2021, there is a low risk of the credit rating being downgraded, but there are concerns about rising default risk, collateral risk, and uncertainty about future payments that are due. Because of concerns about the pandemic, there has been more scrutiny on monitoring increased consumer indebtedness and especially unsecured c...