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The CPM denotes Credit Portfolio Management in both article and text. It describes an essential function for banks as well as other financial institutions such as institutional investors besides insurers. These institution have large multifaceted credit portfolios usually incorporating illiquid loans. The historical role of CPM has been to comprehend the aggregate credit of an institution and enhance returns on such risks through trading in loans in the secondary market as well as hedging. It also meant to identify and manage risk concentrations. The current CPM covers the entire credit book unlike the traditional origination as well as credit risk management roles that only confined to individual deals and borrowers.
CPM has changed greatly following the financial crisis of 2007 which has widened its historical roles. The present regulatory requirement regarding capital and liquidity, increasing cost as well as margin pressure and altered market scenarios have worked to push CPM into a wider role to align with all areas including treasury, business-origination, and finance functions.
The article treats CPM is something that has been evolving for a quite long time. The article gives three primary reasons for CPM’s evolution. These factors include capital and liquidity constrains, increasing cost and margin pressure, and changing market conditions. The article has also explained the process of evolution of CPM’s role dictated by these three factors.
Unlike the text, the article views CPM’s role as having evolved based on its mandate, tools it requires to undertake such a mandate, the mechanism by which it operates with the entire organization as well as the requirement for data.
The article also holds that CPM has to restore its offering for changed circumstances of the banks unlike the text that oppose this view. The article gives CPM a wider role in the management of balance-sheet. In the article, CPM is presently managing the whole array of credit exposures alongside their impact on the balance sheet. The article also holds that CPM is undertaking new activities such as augmented emphasis on the origination of loan, enlarged analytics, utilization of extra metrics, increased explicit alignment with appetite as well as extra legal entity reporting.
Unlike the text, the article hold that CPM require enhanced management framework as well as tool set to undertake its new mandate through a superior analytics as well as a new management framework. The article recognizes tools for measuring regulatory capital alongside capital allocation as the most significant for the function of CPM. The article also holds that users of CPM prefer the utilization of regulatory capital-allocation framework to achieve the new CPM’s mandate. Unlike the article, there is a growing use of wholesale loan purchases as well as sales as the significant tool for CPM in the secondary market.
Unlike the text, the CPM is required to utilize the granular and rigorous limit framework as well as evolution of optimizing tool. The new CPM’s limit system requires an alignment with the entire targets as well as confines for the balance sheet. The text on the other hand, hold that CPM units usually utilized transfer pricing to generate effective internal markets but the article hold that this is currently losing its significance.
De Servigny, Arnaud, and Olivier Renault. Measuring and managing credit risk. McGraw Hill Professional, 2004.
Estrella, Arturo, and Frederic S. Mishkin. "Predicting US recessions: Financial variables as leading indicators." Review of Economics and Statistics 80, no. 1 (1998): 45-61.
Lang, William W., and Julapa A. Jagtiani. "The mortgage and financial crises: The role of credit risk management and corporate governance." Atlantic Economic Journal 38, no. 2 (2010): 123-144.
Nario et al. “The Evolving Role of Credit Portfolio Management”. McKinsey & Company. 2016.
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