CRA Credit Risk & Counterparty Exposure Flashcards

The Z-score model developed by Edward Altman is used to predict:

Answer: Corporate bankruptcy probability

Altman's Z-score combines five financial ratios to produce a score that predicts the probability of corporate bankruptcy within two years.

In a credit portfolio, concentration risk refers to:

Answer: Excessive exposure to a single borrower, sector, or region

Concentration risk arises from large exposures to a single obligor, industry, or geography, making the portfolio vulnerable to correlated defaults.

Which document outlines the terms under which collateral is exchanged between two parties in an OTC derivatives transaction?

Answer: Credit Support Annex (CSA)

The Credit Support Annex (CSA) is a legal document that governs the posting and management of collateral in OTC derivative transactions under the ISDA framework.

Expected Credit Loss (ECL) under IFRS 9 requires that loan loss provisions be recognized:

Answer: At loan origination and updated throughout the life of the loan

IFRS 9 mandates a forward-looking ECL model where provisions are recognized at origination and revised based on changes in credit risk over the loan's life.

A netting agreement in counterparty credit risk allows institutions to:

Answer: Offset positive and negative mark-to-market values across trades with the same counterparty

Netting agreements allow firms to net positive and negative exposures with a counterparty, reducing the overall credit exposure in the event of default.

Credit VaR differs from Market VaR primarily because it:

Answer: Focuses on losses from credit events, which are rare but severe, with non-normal distributions

Credit VaR measures unexpected credit losses at a given confidence level, but unlike market VaR, it deals with fat-tailed, skewed distributions due to default event rarity.