Chapter 3: Banking risk management

Question 1

Forms of Credit Risk Management

Answer 1

Don’t Cancel Scorecards Like George’s Credit Policies. Instead Sell Some Debt Early, Cuz People Need Cash

Diversify:
* Spread loans across different areas.

Collateral:
* Borrowers pledge assets as security.

Scoring:
* Use models to judge borrowers’ risk.

Loan Covenants:
* Rules borrowers must follow.

Guarantees:
* Third parties back up the loan.

Credit Policies:
* Clear rules for who gets loans.

Credit Insurance
* Risk transfer

Sell Loans:
* Sell loans to other investors.

Securitisation:
* Pool loans, sell to investors.

Credit Derivatives (Hedging – e.g. CDS):
* Tools to transfer risk.

Early Warning systems
Capital and Provisioning
On balance sheet Netting

Question 2

Elements of Uncertainty

Answer 2

1. Event
2. Duration
3. Frequency
4. Severity
5. Correlation
6. Capital