Banking Exam Credit Risk and Analysis 5

Question 1

A bank classifies a loan as 'doubtful.' Under OCC guidelines, this means:

Accepted Answer

The loan has all the weaknesses of a substandard loan plus collection is highly questionable

Answer

Doubtful classification indicates full collection is highly improbable, though the loss amount may not yet be determinable, making it one step below 'loss.'

Question 2

What is the purpose of a 'credit risk appetite statement' at a bank?

Accepted Answer

To define the types and levels of credit risk the bank is willing to accept in pursuit of its objectives

Answer

A credit risk appetite statement formally defines acceptable risk levels, guiding portfolio management and individual credit decisions across the institution.

Question 3

In analyzing a small business loan, a lender finds that 80% of revenue comes from one customer. This is best described as:

Accepted Answer

Customer concentration risk that threatens revenue stability

Answer

Heavy reliance on a single customer creates fragile cash flows — loss of that customer could immediately impair the borrower's ability to service debt.

Question 4

Which of the following best defines 'counterparty credit risk' in banking?

Accepted Answer

The risk that the other party in a financial contract will default before the contract's settlement

Answer

Counterparty credit risk arises in derivatives, securities financing, and other bilateral contracts where one party may fail to fulfill its obligations.

Question 5

A bank reviews a borrower's 'global cash flow' by including the owner's personal tax returns alongside business financials. Why?

Accepted Answer

To capture all income sources and debt obligations that affect the owner's total repayment capacity

Answer

Global cash flow analysis combines business and personal finances to assess whether the owner's total obligations can be serviced by combined income streams.

Banking Exam Practice Test

Banking Exam Practice Test

Banking Exam Credit Risk and Analysis 5