Gavilanes 1

Israel Gavilanes
Debock
English IV
Feb 20, 2015
How banks manage credit
The United States ensures that banks provide the necessary credit and financial services
for helping the people to obtain borrowed money and thrive their economy. Because some issues
were found during the past years, the government had to pass acts for fixing the presented
problems. The negative side of too many regulations is the rise of prices in fees to the customer
which is bad for their economy (McFarland). The banks manage credit by scoring individuals
by their payment history.
Banking in its modern form originated in the city-states of Italy during the 1400s. A
handful of banks operated in America during the colonial period, but these establishments were
closed by the British government in the 1740s (McFarland). Between 1840 and 1863, states
adopted free banking laws, finally causing issues about worthiness of the issued papers from
each bank and overextension of credit, problems that made the government take action in the
case imposing regulations, stability was brought after creating the central bank but even so, the
great depression couldnt be avoided. After followed regulations and deregulations stability has
been brought by passing such acts and regulating the banking system (McFarland).
The issuance of credit is a risky business that is why banks and another financial
institutions score the individual depending on their financial situation and credibility. Credit

Gavilanes 2

ratings have been widely regarded by investors, regulators, public media, suppliers, financial
counterparties and customers as indicators of risk (Kuang Yu Flora, and Bo Qin).Evidence
shows that a good credit standing is ranked as the seond-most important concern after financial
flexibility in financial decisions (Kuang Yu Flora, and Bo Qin).
The banks manage credit by scoring individuals by their payment history. Credit risk is a
result of the loan business of commercial banks (Qian Kun, and Duo Mu). The risk refers to
the uncertainty of whether borrowers can keep servicing the loans or not (Qian Kun, and Duo
Mu).
The conclusion is that credit is a risk that is worth to take if it is known what is going to
be made with it as an investment and not as a waste since the repayment includes interests and
the amount grows exponentially if it is not paid on time.

Gavilanes 3

McFarland, Robert E. "Banking Industry." Salem Press Encyclopedia (2013): Research Starters.
Web. 24 Mar. 2015.
Yue, Lori Qingyuan, Jiao Luo, and Paul Ingram. "The Failure Of Private Regulation: Elite
Control And Market Crises In The Manhattan Banking Industry." Administrative
Science Quarterly 58.1 (2013): 37-68. Business Source Premier. Web. 18 Mar. 2015.
Hao, Li, Debarshi K. Nandy, and Gordon S. Roberts. "Effects Of Bank Regulation And Lender
Location On Loan Spreads." Journal Of Financial & Quantitative Analysis 47.6 (2012):
1247-1278. Business Source Premier. Web. 18 Mar. 2015.
Kuang Yu Flora, and Bo Qin. "Credit Ratings And CEO Risk-Taking Incentives." Contemporary
Accounting Research 30.4 (2013): 1524-1559. Business Source Premier. Web. 27 Mar.
2015.
Qian Kun, and Duo Mu. "Credit Risk Management Of Commercial Bank." Journal Of Chemical
& Pharmaceutical Research 6.5 (2014): 1784-1788. Academic Search Complete. Web. 27
Mar. 2015.