MANAGEMENT

Detailed explanation-1: -For example, if a borrowing company is unable to service the debt or repay as its cash flows are not adequate, then the lending institution can seize or take control of the collateral that is pledged and sell it to reduce or recoup the loss.

Detailed explanation-2: -The term “credit risk mitigation techniques” refers to institutions’ collateral agreements that are used to reduce risk arising from credit positions. Part 2 Chapter 5 of the Solvency Regulation specifies whether and to what extent collateralisations are recognised.

Detailed explanation-3: -Credit risk can be mitigated by reducing payment terms to accounts with higher credit risk, e.g. changing from Net 30 to Net 15. Reducing excessive payment terms for other accounts will further mitigate risk and reduce investment in accounts receivable.

Detailed explanation-4: -The two main types of credit derivatives are total-rate-of-return (TROR) swaps and credit-default (CD) swaps. Although these instruments are typically discussed in terms of a single loan from a single borrower, they can be and often are applied to pools of loans from different borrowers.