Credit Risk and Analysis Flashcards

Which ratio best measures a borrower's ability to service debt from operating cash flow?

Answer: Debt service coverage ratio (DSCR)

DSCR equals net operating income divided by total debt service, directly measuring cash flow adequacy for loan repayment.

A borrower's credit score drops from 720 to 640 during underwriting due to a new delinquency. What is the most appropriate lender action?

Answer: Re-underwrite the loan under updated risk parameters

Material changes in credit profile require re-underwriting to ensure the loan still meets risk standards.

In credit analysis, 'concentration risk' refers to:

Answer: Overexposure to a single borrower, sector, or geography

Concentration risk arises when a portfolio is heavily exposed to a single borrower, industry, or region, amplifying potential losses.

Which Basel framework introduced the requirement for banks to hold capital against operational risk in addition to credit and market risk?

Answer: Basel II

Basel II expanded the capital framework to include operational risk as a third pillar alongside credit and market risk.

A 'covenant-lite' loan is characterized by:

Answer: Fewer or no maintenance financial covenants protecting the lender

Covenant-lite loans lack traditional maintenance covenants, reducing the lender's early warning signals and protective triggers.

What does a 'vintage analysis' in credit risk assess?

Answer: Loan performance grouped by origination period to identify underwriting quality trends

Vintage analysis tracks default and delinquency rates by origination cohort, revealing how economic conditions and underwriting standards affect performance.

Which of the following best describes 'expected loss' (EL) in credit risk modeling?

Answer: The product of probability of default, loss given default, and exposure at default

EL = PD × LGD × EAD, representing the average loss a bank anticipates from a credit exposure over a given period.