Asset quality an evaluation of an asset to measure the credit risk associated with it.

Description

Asset quality is related to the left-hand side of the bank

Bank

A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...

 balance sheet

Balance sheet

In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...

. Bank managers are concerned with the quality of their loan

Loan

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower....

s since that provides earnings for the bank. Loan quality and asset quality are two terms with basically the same meaning.

Government bonds and T-bills are considered as good quality loans whereas junk bonds, corporate credits to low credit score firms etc. are bad quality loans. A bad quality loan has a higher probability of becoming a non-performing loan

Non-performing loan

A Non-performing loan is a loan that is in default or close to being in default. Many loans become non-performing after being in default for 3 months, but this can depend on the contract terms....

 with no return. The ratio of non-performing loans in Japan

Japan

Japan is an island nation in East Asia. Located in the Pacific Ocean, it lies to the east of the Sea of Japan, China, North Korea, South Korea and Russia, stretching from the Sea of Okhotsk in the north to the East China Sea and Taiwan in the south...

 is expected to be as high as 25% of the overall bank assets.

Bank management components are:

1. Asset management
2. Liquidity management
3. Liability management
4. Capital adequacy management
5. Risk management
   Risk management
   Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
   
   

See also

• Risk-weighted asset
  Risk-weighted asset
  Risk-weighted asset is a bank's assets or off-balance sheet exposures, weighted according to risk. This sort of asset calculation is used in determining the capital requirement or Capital Adequacy Ratio for a financial institution...
  
  
• CAMELS ratings
  CAMELS ratings
  The CAMELS ratings or Camels rating is a United States supervisory rating of the bank's overall condition used to classify the nation’s fewer than 8,000 banks. This rating is based on financial statements of the bank and on-site examination by regulators like the Federal Reserve, the Office of the...
  
  
• Bank condition
  Bank condition
  Bank condition is a random variable used to represent the probability of failure of a bank. The true probability of failure is unknown to depositors....
  
  
• Banking regulation