Banking Exam Credit Risk and Analysis 3

Question 1

A commercial real estate loan has an LTV of 85%. Which best describes the lender's risk position?

Accepted Answer

Elevated risk with limited equity cushion if property values decline

Answer

An 85% LTV leaves only 15% equity cushion, meaning even a modest property value decline could result in the loan being underwater.

Question 2

What is 'loss given default' (LGD) in credit risk?

Accepted Answer

The portion of exposure a lender loses after recoveries when a borrower defaults

Answer

LGD measures what percentage of EAD is actually lost after collateral liquidation and recovery efforts following a default event.

Question 3

Which type of credit risk analysis focuses on industry trends, competitive position, and macroeconomic factors?

Accepted Answer

Qualitative analysis

Answer

Qualitative analysis evaluates non-numeric factors like management quality, industry dynamics, and competitive advantages that affect repayment capacity.

Question 4

A bank uses a 'through-the-cycle' (TTC) approach to PD estimation. What does this mean?

Accepted Answer

PD reflects average default rates across the full economic cycle, not just current conditions

Answer

TTC PD estimates are stable across economic cycles, reducing procyclicality compared to point-in-time (PIT) estimates.

Question 5

Under the 5 Cs of credit, 'capacity' refers to:

Accepted Answer

The borrower's cash flow and ability to repay the debt

Answer

Capacity assesses whether the borrower generates sufficient income or cash flow to meet debt obligations.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Credit Risk and Analysis 3