Credit Risk and Analysis Flashcards
7 cards from real Banking Exam practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Credit Risk and Analysis flashcards as text
A commercial real estate loan has an LTV of 85%. Which best describes the lender's risk position?
Answer: Elevated risk with limited equity cushion if property values decline
An 85% LTV leaves only 15% equity cushion, meaning even a modest property value decline could result in the loan being underwater.
What is 'loss given default' (LGD) in credit risk?
Answer: The portion of exposure a lender loses after recoveries when a borrower defaults
LGD measures what percentage of EAD is actually lost after collateral liquidation and recovery efforts following a default event.
Which type of credit risk analysis focuses on industry trends, competitive position, and macroeconomic factors?
Answer: Qualitative analysis
Qualitative analysis evaluates non-numeric factors like management quality, industry dynamics, and competitive advantages that affect repayment capacity.
A bank uses a 'through-the-cycle' (TTC) approach to PD estimation. What does this mean?
Answer: PD reflects average default rates across the full economic cycle, not just current conditions
TTC PD estimates are stable across economic cycles, reducing procyclicality compared to point-in-time (PIT) estimates.
Under the 5 Cs of credit, 'capacity' refers to:
Answer: The borrower's cash flow and ability to repay the debt
Capacity assesses whether the borrower generates sufficient income or cash flow to meet debt obligations.
Which credit risk metric measures the total amount a borrower owes at the time of default?
Answer: Exposure at Default (EAD)
EAD is the outstanding balance plus accrued interest and undrawn commitments the lender is exposed to at the moment of default.
A bank's internal credit rating system downgrades a borrower from 'pass' to 'special mention.' This typically indicates:
Answer: Potential weaknesses that deserve management attention but do not yet threaten repayment
Special mention is a regulatory classification for loans with potential weaknesses requiring close monitoring but not yet classified as substandard.