Literature Review Of Commercial Banking

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3.0 Literature Review
In commercial lending, commercial banking plays a dominant role (Allen & Gale, 2004). In many countries, commercial banks routinely perform investment banking activities by providing new debt to their customers (Gande, 2008). The credit creation process works smoothly when funds are transferred from ultimate savers to borrower (Bernanke, 1993). There are many potential sources of risk, including liquidity risk, credit risk, interest rate risk, market risk, foreign exchange risk and political risks (Campbell, 2007). However, credit risk is the biggest risk faced by banks and financial intermediaries (Gray, Cassidy, & RBA., 1997). The indicators of credit risk include the level of bad loans (Non- performing loans), problem loans or provision for loan losses (Jimenez &Saurina, 2006). Credit risk is the risk that a loan which has been granted by a bank, will not be either partially repaid on time or fully (Campbell, 2007), and where there is a risk of customer or counterparty default (Gray, et al., 1997)..

Credit risk is by far the most significant risk faced by banks and the success of their business depends on accurate measurement and efficient management of this risk to a greater extent than any other risk (Giesecke, 2004). Increases in credit risk will raise the marginal cost of debt and equity, which in turn increases the cost of funds for the bank (Basel Committee, 1999).
To measure credit risk, there are a number of ratios employed by researchers.

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