Credit Risk Management Default and Recovery Analysis

Question 1

Under Basel, the standard definition of default requires a borrower to be past due how many days?

Accepted Answer

90 days

Answer

Basel defines default as occurring when a borrower is 90 days past due on a material obligation or when the bank believes full repayment is unlikely.

Question 2

What is the 'recovery rate' on a defaulted loan?

Accepted Answer

The fraction of the defaulted exposure that is ultimately recovered

Answer

Recovery rate is the proportion of exposure at default (EAD) recovered after a default event, often measured as a percentage.

Question 3

Which factor most strongly affects Loss Given Default (LGD) on a secured loan?

Accepted Answer

The quality and value of the collateral

Answer

Collateral quality and value are the primary determinants of LGD for secured loans; higher-quality collateral reduces potential losses upon default.

Question 4

What does 'seniority' of a debt claim refer to in the context of recovery?

Accepted Answer

The priority of repayment in the event of bankruptcy or liquidation

Answer

Seniority determines the order in which creditors are repaid; senior secured creditors are paid first, followed by senior unsecured, subordinated, and equity holders.

Question 5

What is 'cure rate' in credit risk management?

Accepted Answer

The proportion of defaulted loans that return to performing status

Answer

The cure rate measures the proportion of defaulted or delinquent accounts that subsequently return to fully performing status without formal restructuring.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Default and Recovery Analysis