Correlations btwn Credit Risk and Operational Risk
- Thread starter trigg989
- Start date
Hi there @trigg989
In my opinion, there is !
Consider the classic case of the events leading up to the Financial crisis of 2007-2008, take especially the case of Countrywide corp. They assumed that once, any Loan given to absolutely non credit worthy people is securitized and removed from their Balance Sheets, they can ignore the quality of their underwriting standards. Thus, this gave rise to a moral hazards and absolute disincentives to comply with underwriting standards and make proper KYC (Know your customer verifications). This was a proper case of operational risk multiplying.
What they didn't understand was that Risks can only be transferred, not eliminated, as it took some time for them to completely dispose off the securitized Assets, whatever they possessed posed huge credit risks and hence, we can see a classic case of operational risks leading to credit risks as the value of the house, which was held as collateral fell as the homeowners defaulted on their payment obligations.
The same thing can be extended for the investors in these assets as well, as these investors, relying purely on the credit ratings, ignored their investment policy and guidelines and they did not check if these assets complied with their investment policy (operational risks) which in turn led to credit risks being taken on by them. Consider AIG which did not understand the CDO's on which it sold Credit Default Swaps to Goldman (operational risks) and it was forced to the brink of insolvency when it was asked to insure the same without the pooled premiums of traditional insurance. (Credit Risks from the products on which the CDS was written as well as counterparty risk to Goldman)
Thanks
In my opinion, there is !
Consider the classic case of the events leading up to the Financial crisis of 2007-2008, take especially the case of Countrywide corp. They assumed that once, any Loan given to absolutely non credit worthy people is securitized and removed from their Balance Sheets, they can ignore the quality of their underwriting standards. Thus, this gave rise to a moral hazards and absolute disincentives to comply with underwriting standards and make proper KYC (Know your customer verifications). This was a proper case of operational risk multiplying.
What they didn't understand was that Risks can only be transferred, not eliminated, as it took some time for them to completely dispose off the securitized Assets, whatever they possessed posed huge credit risks and hence, we can see a classic case of operational risks leading to credit risks as the value of the house, which was held as collateral fell as the homeowners defaulted on their payment obligations.
The same thing can be extended for the investors in these assets as well, as these investors, relying purely on the credit ratings, ignored their investment policy and guidelines and they did not check if these assets complied with their investment policy (operational risks) which in turn led to credit risks being taken on by them. Consider AIG which did not understand the CDO's on which it sold Credit Default Swaps to Goldman (operational risks) and it was forced to the brink of insolvency when it was asked to insure the same without the pooled premiums of traditional insurance. (Credit Risks from the products on which the CDS was written as well as counterparty risk to Goldman)
Thanks
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