Use Case for Assessing Risk on Commercial Leasing
Why assess the risk? Leasing is a form of financing for fixed assets that provides a lessee the right to use depreciable assets without tying up working capital. The higher risk inherent in a typical lease transaction is due to the higher advance-to-collateral value; a longer payment period; and, in some cases, the lessor’s dependence on the sale of leased property to recover a portion of the initial investment. Regulatory agencies have attributed Credit Risk, Interest Rate Risk, Liquidity Risk, Transaction Risk and Compliance risk to Commercial Leasing activities undertaken by a bank. Management should have a system that identifies, measures, monitors, and controls the bank’s risk exposure. Before entering into a lease, a bank must reasonably expect to realize the return of its full investment in the leased property, and the estimated cost of financing the property over the lease term, from a combination of rental payments, estimated tax benefits, and estimated residual value of the property when the lease term expires.
Who should assess the risks? Chief Credit Officer, Credit Administrator, Commercial Leasing Manager, Chief Financial Officer
How to assess the risk: Rate the KRIs to determine if a threat would successfully exploit a vulnerability and to justify expenditures to implement countermeasures to protect the bank’s assets or reputation. Use the “Focus Risk Assessment” tool for in-depth analysis of risks and mitigation techniques.