Measurement advances allow for the development of a coherent management framework for setting 1) a limit on portfolio loss volatility, compatible with the bank's capital structure and its overall risk tolerance? 2) limits on the exposure size of sectors and individual transactions which ensure the credit portfolio will be adequately diversified, 3) target weights for sectors (and individual counterparties) which increase return within the target risk limits, and 4) expected returns for individual assets based upon their unexpected loss contribution. The framework used for loan portfolio management increasingly resembles that used for investment management.

The central recognition underpinning both the technical and management advances in this stage is that banks (like any other investor) must be paid a fair market price for ABSORBING VOLATILITY or they will detract from their shareholder's value. It also becomes evident that that if credit loss volatility can be accurately quantified, risk-adjusted loan prices can be compared readily to risk / return performance indices from other markets (equity, bond, commodity, etc).

Thanx in advance

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