Credit Risk

Question 1

Credit Risk factors

Answer 1

Default
Increased probability of default
More severe loss than expected (higher exposure or lower recovery)
Default on payment of goods already rendered

Question 2

Credit Risk evaluation

Answer 2

1. Willingness and capacity to repay
2. Effect of the external conditions on ability to repay
3. Inherent characteristics of the instrument and impact on ability to repay
4. Quality and adequacy of risk mitigants such as collateral and guarantees

Question 3

Qualitative techniques

Answer 3

Primarily to assess the borrowers willingness to pay

Question 4

Four types of borrowers

Answer 4

Consumers
Corporations
Financial Instiutions
Government or government related entities

Question 5

Quantitative measures

Answer 5

Probability of Default
Loss given default
Exposure at default
Expected loss (PD * LGD * EAD)
Time horizon

Question 6

Leverage ratio

Answer 6

Tier 1 capital divided by Gross exposure

Question 7

Minimum leverage ratio

Answer 7

3%