Credit Risk Management Credit Portfolio Management 1 — Questions and Answers
Question 1: What is the primary goal of credit portfolio management?
- Maximizing loan origination volume
- Optimizing risk-return trade-offs across the entire loan portfolio (Correct answer)
- Minimizing the number of borrowers in default
- Eliminating all credit concentration risk
Correct answer: Optimizing risk-return trade-offs across the entire loan portfolio
Credit portfolio management seeks to optimize the risk-adjusted return of the entire loan portfolio through diversification and active risk management.
Question 2: Credit concentration risk arises from what?
- High portfolio diversity across sectors
- Overexposure to a single borrower, sector, or geography (Correct answer)
- Excessive use of collateral
- Low default correlations between obligors
Correct answer: Overexposure to a single borrower, sector, or geography
Concentration risk occurs when a portfolio is over-exposed to a single counterparty, industry, or region, amplifying losses when that segment deteriorates.
Question 3: Which metric measures portfolio credit risk at a given confidence level over a specified horizon?
- Expected Loss (EL)
- Credit VaR (Value at Risk) (Correct answer)
- Net Interest Margin
- Return on Equity
Correct answer: Credit VaR (Value at Risk)
Credit VaR estimates the maximum credit loss that will not be exceeded at a given confidence level (e.g., 99.9%) over a defined time horizon.
Question 4: In credit portfolio models, asset correlation refers to what?
- The similarity of loan maturities across borrowers
- The tendency of borrowers' assets to move together, affecting joint default probability (Correct answer)
- The relationship between credit spreads and interest rates
- The proportion of secured loans in a portfolio
Correct answer: The tendency of borrowers' assets to move together, affecting joint default probability
Asset correlation measures how borrowers' underlying asset values move together; high correlation increases tail risk as defaults cluster during downturns.
Question 5: What does 'economic capital' represent in credit portfolio management?
- The minimum regulatory capital mandated by Basel
- The capital a bank internally determines is needed to cover unexpected losses at a target solvency level (Correct answer)
- The total loan loss reserves held against expected losses
- The market capitalization of the bank
Correct answer: The capital a bank internally determines is needed to cover unexpected losses at a target solvency level
Economic capital is an internal estimate of the capital needed to remain solvent at a target confidence level, often higher than regulatory minimums.
Question 6: What is 'name concentration' in a credit portfolio?
- A large number of small borrowers in the same industry
- Excessive exposure to a single borrower relative to total portfolio (Correct answer)
- A portfolio with many loans in the same geographic area
- Overweighting of investment-grade names
Correct answer: Excessive exposure to a single borrower relative to total portfolio
Name concentration refers to single-borrower or single-counterparty concentration, where one obligor's default would cause material portfolio loss.
Credit Risk Management Credit Portfolio Management 1
What is the primary goal of credit portfolio management?