Credit Risk Appetite: Industry Risk

An industry is generally defined by its product, location, and geographical reach. The combination of factors affecting a particular industry helps determine the riskiness of that industry in terms of its stage of development (growing or declining), long-term growth potential, and vulnerability to short-term economic conditions. This influences whether a particular industry is considered high, medium, or low risk, which in turn influences appetite for that industry. We discuss the importance of industry classification and the various approaches banks adopt when setting credit risk appetite for industries. The function of industry risk analysis reports is also examined.