Consumer credit risk measurement : challenges for the Paraguayan banking system

Abstract

Credit risk is often a critical risk in the financial sector. Therefore, how a financial institution manages its credit risk is an important determinant of profitability and solvency. In this regard, the identification and measurement of credit risk is the first component of efficient risk management. Correct and timely credit ratings are important for risk management systems, and for informing regulators about financial system risks. Credit risk is the main risk faced by the Paraguayan financial sector. Effectively managing it requires banking supervision and regulation in line with international best practices. As a step in that direction, this research assesses the Paraguayan banking regulation of credit risk and compares it to the principles and the best practices about credit risk management issued by the Basel Committee. I propose principles to guide the implementation of statistical models for better measurement of credit risk in Paraguayan financial institutions.