Part 2

Question 1

What are the different types of credit risk / counterparty risk?

Answer 1

Pre settlement
Settlement
Delivery
Issuer 
Payment
Default

Question 2

Lgd
PD
Ead

Answer 2

LGD  = Loss Given Default. Expressed as a percentage. Foundation: standard rate set by regulator but then these are adjusted for collateral treatment e.g. rate for value of property will change depending on value.
PD = Probability of default. Percentage. Based on historical data.
EAD = Exposure at default if loss actually occurs. Looks at 12 month view.

Question 3

The bank can control trading market risk by using VaR. What does VaR mean?

Answer 3

Value at Risk.

Measure of the risk of loss on a portfolio based on a time and probability horizon.

Question 4

what is concentration risk?

Answer 4

spread of loans over number of debtors
what percentage does any one customer represent?
limits should be set and monitored

Question 5

Limitations of credit risk assessment

Answer 5

• models only as good as data fed through them
• can’t always be accurate - always unknowns
• changing circumstances
• Risks can be hard to measure
• External ratings aren’t always reliable

Question 6

What is asset and liability risk?

Answer 6

Risk faced by a bank due to a mismatch between assets and liabilities either due to liquidity or changes in interest rates

Question 7

What does LM aim to do , and how does it do this?

Answer 7

what
aims to maximise profitability and long term viability

how
looks at the entire balance sheet - coordinated management
systematic approach

Question 8

How can interest rate risk be mitigated?

Answer 8

DERIVATIVES

Interest Rate Swaps

Securitisation

Exchange Traded Futures

Options (OTC and exchange traded)

Question 9

What is the credit risk management function for?

Answer 9

Assessing the financial state of customers and other organisations that it will lend funds to