By Loretta Worters, Vice President – Media Relations
The credit crisis of 2007-2008 was a severe worldwide economic crisis considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s, to which it is often compared. “Everyone was impacted, not just those working in banks. Because the price of debt, the ability to get financing changed, a lot of things happened. So, everyone is impacted by credit every day, whether they know it or not,” said Tamika Tyson, senior manager, credit with Noble Energy, in this video interview.
Tyson, who is also a non-resident scholar with the Insurance Information Institute, said what she is most concerned about is debt repayments that are coming due. “If a global recession happens, as economists are predicting, and it happens in conjunction within an election, it can be difficult for companies to refinance any mature debentures they have coming in 2020,” she said. “Leadership needs to be thinking about the risks in their company. Not just the credit risks, but all risks related to their business.”
What leads to credit risk and how can companies protect themselves?
The main microeconomic factors that lead to credit risk include limited institutional capacity, inappropriate credit policies, volatile interest rates, poor management, inappropriate laws, low capital and liquidity levels, direct lending, massive licensing of banks, poor loan underwriting, laxity in credit assessment, poor lending practices, government interference and inadequate supervision by the central bank.
Doing a comprehensive risk assessment is a great idea for everyone within an organization, noted Tyson. “Once an assessment is made as to how much risk they are exposed to, then they can develop a strategy to help protect the company. If there’s more risk in the system than a company is willing to take, then they should consider obtaining credit risk insurance,” she said.
What is Credit Risk Insurance?
Credit risk insurance is a tool to support lending and portfolio management. It protects a company against the failure of its customers to pay trade credit debts owed to them. These debts can arise following a customer becoming insolvent or failing to pay within the agreed terms and conditions.
What can impact credit risk?
The factors that affect credit risk range from borrower-specific criteria, such as debt ratios, to market-wide considerations such as economic growth. Political upheaval in a country can have an impact, too.
For example, political decisions by governmental leaders about taxes, currency valuation, trade tariffs or barriers, investment, wage levels, labor laws, environmental regulations and development priorities, can affect the business conditions and profitability.
“At the end of the day, political risks have the ability to impact credit risks. Credit risks rarely impact political risks,” she said. “We have a lot of different views right now on the political spectrum so until we know how that’s going to work out, it’s going to create risk in the system, and we’ll see how different companies react to that,” Tyson said.
“We all talk about biases. Everyone thinks they’re better off and it’s always someone else that has the issue. It’s the same when looking at a risk assessment or reviewing someone’s financials; everyone thinks they’re doing fine, but then they discount what’s going on with other people. That’s why it is imperative companies self-evaluate as they evaluate those they transact business with.”
“Know your portfolio, know your customers and understand your risk tolerance,” said Tyson. “Know, too, there are a lot of tools available to help you mitigate against those risks.”