Credit Risk Modelling Flashcards
What is Credit Risk?
The possibility of a loss resulting from a borrower going into default
What is Default
The inability to repay a debt
What is the Capital Adequacy Ratio (CAR)
The measurement of a bank’s available capital expressed as a percentage of a bank’s risk-weighted exposures
What is the logic of Risk-Weighted Assets?
Assets held by banks should be classified based on their risk level
What are the four key parameters to the IRB (internal ratings-based) Approach
- PD: Probability of Default
- LGD: Loss Given Default
- EAD: Exposure at Default
- M: Maturity
What is PD?
Probability of Default(PD) is the likelihood that a borrower will fail to repay a certain debt
What is LGD
Loss Given Default is the estimated amount of money (expected loss) a financial institution loses when a borrower defaults on a loan.
What is Exposure at Default (EAD)?
The total value a bank is exposed to when a loan defaults
What is Maturity (M)?
The length of time to final payment date of a loan (or other financial instruments)
EAD, along with LGD and PD, are used to calculate what?
the credit risk capital of financial institutions
What Does Exposure on a Loan Mean?
- the maximum potential loss a lender may incur if the borrower defaults.
- risk measurement technique to assess the position of the lender, the characteristics of the borrower, and the possibility of loss.
What is IFRS 9?
a reporting standard
What is Expected Loss, and how may a bank calculate it?
the average loss that a bank expects for a given financial year
- EAD x LGD x PD
What is Unexpected Loss and how is it calculated?
Unexpected Loss (UL) is the loss that exceeds EL
- UL = VaR - EL
