Banking Exam Credit Risk and Analysis 2

Question 1

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

Accepted Answer

Debt service coverage ratio (DSCR)

Answer

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

Question 2

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

Accepted Answer

Re-underwrite the loan under updated risk parameters

Answer

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

Question 3

In credit analysis, 'concentration risk' refers to:

Accepted Answer

Overexposure to a single borrower, sector, or geography

Answer

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

Question 4

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

Accepted Answer

Basel II

Answer

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

Question 5

A 'covenant-lite' loan is characterized by:

Accepted Answer

Fewer or no maintenance financial covenants protecting the lender

Answer

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

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