What is risk differentiation in SAP (FS-BA-PM-CR - Credit Risk)?

SAP Term: risk differentiation

• Component: FS-BA-PM-CR

• Component Name: Credit Risk

• Description: Function that helps banks to meet the requirements of Basel II that stipulate that separate capital charge amounts are to be calculated for each category of risk inherent in a transaction for example, default risk, special market risk, direct settlement risk, third-party settlement risk, dilution risk, and residual value risk. Risk differentiation assigns the relevant risk categories and results factors to a risk asset, and adjusts any collateral relationships that may exist according to the risk categories found.

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• Key Concepts: 
  Risk differentiation is a process used in Credit Risk Management (FS-BA-PM-CR) to assess the risk of a customer or counterparty. It involves analyzing the customer’s creditworthiness and assigning them a risk rating based on their financial history, credit score, and other factors. This rating is then used to determine the terms of the loan or other financial agreement. 
  
  How to use it: 
  Risk differentiation is used to assess the risk of a customer or counterparty before entering into a financial agreement. The process involves analyzing the customer’s creditworthiness and assigning them a risk rating based on their financial history, credit score, and other factors. This rating is then used to determine the terms of the loan or other financial agreement. 
  
  Tips & Tricks: 
  When assessing a customer’s risk, it is important to consider all available information, including their financial history, credit score, and other factors. Additionally, it is important to consider the customer’s ability to repay the loan or other financial agreement in order to ensure that the terms are fair and reasonable. 
  
  Related Information: 
  Risk differentiation is an important part of Credit Risk Management (FS-BA-PM-CR). It is also closely related to credit scoring, which is used to assess a customer’s creditworthiness. Additionally, it is important to consider other factors such as collateral and repayment capacity when assessing a customer’s risk.