How much risk is too much?

Banks sell home loans.

One of their key risk measurementsÂ is the number of clients that fail to make their repayments.Â Before they even sell loans, they decide what an â€œacceptableâ€ level of defaults is.

One way they can control the level of defaults is by making it harder or easier to get a loan.

For example ABC bank sets their limit at 2% (ie 2% of clients will be in default at any given time).Â If defaults rise above 2%, ABC will consider tightening their lending criteria.Â If defaults go below 2%, they know they are being too strict (and turning away profit) so they may loosen their lending criteria.

It is important to note that XYZ bank might set their level at 5% – this simply means that XYZ has a higher tolerance for risk than ABC.

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How much risk is too much?

Banks sell home loans.

News