Credit transformation can be a difficult concept to understand
at first, but it is an important part of a range of banking processes. Nicholas
Calcanes tries to keep things simple when approaching the concept, with the
following being an explanation that boils the concept down to the basics.
Credit Intermediation
The credit transformation process is one types of what is known
as the credit intermediation process. It is intended to be a dynamic process
that allows for repeated tweaking in order to endure that it matches up to the
current conditions of the market and its continued evolution. Other forms of
the credit intermediation process include size transformation and maturity
transformation.
Who Does Credit Transformation Work?
Credit transformation is directly linked to the bank’s credit risk, and will usually be used when the bank wishes to invest in securities
that offer a potentially higher yield while also having a lower credit standing
than the bank’s existing funding instruments, such as stocks, bonds and
derivatives. In essence, this makes it a method for banks to gain returns by
using credit mismatches between their liabilities and assets.
As an example of the process in action, consider that you have a
high-end borrower and a mid-range borrower. A successful credit transformation
will see you issue liabilities to your high-end borrower, while lending to the
mid-range borrower. This allows the bank to adjust to irregular market
activity, in addition to taking advantage of opportunities that arise with the
bank’s previously defined funding instruments.
Nicholas Calcanes recognizes that credit transformation allows a
bank to better manage its credit risk, ensuring that it is more able to meet
all obligations.
