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
Which of the following is a primary purpose of credit stress testing?
Answer: To assess portfolio resilience under adverse economic scenarios
Stress testing evaluates how a credit portfolio would perform under severe but plausible adverse conditions, informing capital planning and risk limits.
A borrower has a high debt-to-income (DTI) ratio. What does this signal to a lender?
Answer: The borrower may struggle to manage additional debt obligations
A high DTI means a large portion of income is already committed to debt payments, leaving less cushion for new obligations.
In a leveraged buyout (LBO) scenario, what is the primary credit concern for senior lenders?
Answer: High debt load reducing cash flow available for debt service
LBOs are highly leveraged transactions where thin cash flow margins leave little buffer for debt service if business performance declines.
What is 'credit migration risk'?
Answer: The risk that a borrower's credit rating deteriorates over time, increasing default probability
Credit migration risk is the probability that a borrower's rating will deteriorate, affecting the value of the exposure even before default.
A bank originates a loan with a personal guarantee from the business owner. What credit risk benefit does this provide?
Answer: It provides an additional repayment source if the business defaults
A personal guarantee gives the lender recourse against the guarantor's personal assets, creating a secondary repayment source beyond business cash flows.
Under CECL (Current Expected Credit Loss) accounting, banks must recognize loan loss reserves based on:
Answer: Lifetime expected credit losses at loan origination
CECL replaced the incurred-loss model, requiring banks to estimate and reserve for expected credit losses over the full remaining life of a loan at origination.
Which of the following best describes 'credit enhancement' in structured finance?
Answer: Mechanisms that improve the credit quality of a security, such as overcollateralization or subordination
Credit enhancements like overcollateralization, cash reserves, and tranching absorb losses before senior investors are affected, improving their credit quality.