Lending

Question 1

6 Risks of Lending (Bank)

Answer 1

1. Credit risk
2. Suitability risk
3. Liquidity risk
4. Reputational risk
5. Valuation risk
6. Interest rate risk

Question 2

Creditworthiness

Answer 2

Client‘s willingness to pay the loan

Question 3

Creditworthiness Capacity

Answer 3

Capacity/ ability to pay the loan

Question 4

Creditworthiness Corporates

Answer 4

1. Management
2. Product Mix
3. Reputation (press reports)
4. Payment behaviour

Question 5

Credit capacity corporates

Answer 5

1. Financial analysis

2. Investment plan

Question 6

Warning status

Answer 6

Margin erosion up to 25%
CA informs client to correct warning status.
In CH within 30 days

Question 7

Margin Call

Answer 7

Margin erosion : 25 - 50 %
CA sends margin call letter to client
In CH: client has to restore in 8 days
During this period: no new transactions allowed

Question 8

Close out

Answer 8

Margin erosion: more than 50%

Immediate action

Question 9

Unsecured

Answer 9

Margin erosion 100%»> lomabard loan becomes unsecured

Question 10

Lombard loan

Answer 10

Secured by the borrower‘s invested asssets

Question 11

Risk transformation 4

Answer 11

1. diversifying client groups
2. screening and monitoring borrowers
3. holding capital and reserves to make up for unexpected losses
4. holding HQLA (high quality liquid assets) : central bank reserves and sovereign bonds

Question 12

Recourse loan

Answer 12

Bank has the legal right to pursue client’s other assets in case the client is not able to repay

Question 13

Valuation risk

Answer 13

Risk that the value of the collateral falls below the value of the loan.&raquo_space;> not relevant for unsecured loans

Question 14

Haircut

Answer 14

Security margin: protects bank from potential losses in volatile environment