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 bank classifies a loan as 'doubtful.' Under OCC guidelines, this means:
Answer: The loan has all the weaknesses of a substandard loan plus collection is highly questionable
Doubtful classification indicates full collection is highly improbable, though the loss amount may not yet be determinable, making it one step below 'loss.'
What is the purpose of a 'credit risk appetite statement' at a bank?
Answer: To define the types and levels of credit risk the bank is willing to accept in pursuit of its objectives
A credit risk appetite statement formally defines acceptable risk levels, guiding portfolio management and individual credit decisions across the institution.
In analyzing a small business loan, a lender finds that 80% of revenue comes from one customer. This is best described as:
Answer: Customer concentration risk that threatens revenue stability
Heavy reliance on a single customer creates fragile cash flows — loss of that customer could immediately impair the borrower's ability to service debt.
Which of the following best defines 'counterparty credit risk' in banking?
Answer: The risk that the other party in a financial contract will default before the contract's settlement
Counterparty credit risk arises in derivatives, securities financing, and other bilateral contracts where one party may fail to fulfill its obligations.
A bank reviews a borrower's 'global cash flow' by including the owner's personal tax returns alongside business financials. Why?
Answer: To capture all income sources and debt obligations that affect the owner's total repayment capacity
Global cash flow analysis combines business and personal finances to assess whether the owner's total obligations can be serviced by combined income streams.
What does a 'credit watch' designation from a rating agency typically signal?
Answer: The issuer is under review for a possible rating change in the near term
Credit watch indicates an imminent review that could result in an upgrade, downgrade, or affirmation, typically resolved within 90 days.
Which financial metric is most useful for assessing a company's short-term liquidity in credit analysis?
Answer: Current ratio
The current ratio (current assets ÷ current liabilities) measures whether a borrower can cover near-term obligations with liquid assets.