This is the second part of my series of the banking sector using the CAMELS framework. Please refer to my first part on capital adequacy here.In my previous article on capital adequacy, I briefly described how the losses incurred from bad loans can wipe out a bank’s capital base. In this article, I will explore how this process works in further detail, as part of understanding a bank’s asset quality. A bank’s asset quality is paramount to its long term viability. Bad loans can haunt a bank for years, if not decades. Credit risk management is key not just for the viability of the bank, but for the economy as a whole. It is important to keep in mind that defaults are part and parcel of doing business for a bank. It is regarded as a business expense that the bank tries to minimise, while maximising profits. Ultimately, it is a...
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