Measuring and managing credit risk is turning out to be a very complex issue with each passing day. The main reason for this is the non-linear pay-off from newer breed of credit derivatives. The legacy approach employed in this regard primarily depends on the system of rating. However, this qualitative approach fails to address the core problem of default risk management in any bank. Many have proposed a good number of credit risk measuring models. This article attempts to review various cutting edge approaches in assessing the exposure of a credit portfolio.

In microeconomic terms, a bank is the most adequate pareto-optimal alliance of individual agents. However, achieving this optimality is becoming complex as well as difficult everyday for all the banks. It is more so when forming universal bank is the order of the day and managing balance sheet of any bank poses a greater challenge to us. The banks mainly perform three broad functions in any economy - liquidity intermediation, risk intermediation and information intermediation. While performing the first function small depositors' money is channelized to the corporates who are short of funds. These depositors are inadequately informed to monitor their bank. As a result, protecting their money becomes an important social responsibility of banks.

Credit risk is undoubtedly one of the important aspects in finance. Managing credit risk is proving to be increasingly difficult everyday. It is more so due to the advent of newer credit derivatives, which are very rarely visible in banks' balance sheets. The non-linear pay-off from these products makes the job difficult. It is not possible for any manual system to take customized care for each of the innumerable credit accounts in any bank's balance sheet. In this regard, the system of rating is being used for quite some time. It reduces the load on the account monitoring authority by shifting the focus from innumerable account holders to a few ratings. Today ratings are one of the most popular forms of qualitative measurements of credit risk. Various rating agencies have developed their proprietary methodologies to assess the creditworthiness of companies.

Treasury Management Magazine, Credit Risk, Credit Derivatives, Risk Management, Credit Risk Measuring Models, Liquidity Intermediation, Risk Intermediation, Account Monitoring Authorities, Credit Metrics, Credit Risk Management Techniques, Analytical Models.