Credit Risk Management Cheat Sheet 2026

The 30 highest-yield Credit Risk Management facts, distilled from real exam questions. Print it, save it as a PDF, or study it here — free, no sign-up.

1. A portfolio manager applies credit VaR at a 99.9% confidence level over a one-year horizon. This metric is best used to: → Set economic capital buffers to absorb unexpected credit losses
2. Which of the following best describes 'granularity' in a credit portfolio? → The degree to which exposures are diversified across many small obligors
3. Which Basel III metric requires banks to maintain a minimum ratio of high-quality liquid assets to net cash outflows over a 30-day stress period? → Liquidity Coverage Ratio (LCR)
4. What is the primary purpose of an Initial Margin (IM) in bilateral OTC derivatives? → To cover potential future exposure from the time of default to the close-out of positions
5. Which credit risk concept refers to the tendency of credit quality to deteriorate as economic conditions worsen? → Procyclicality
6. In credit risk, what is a 'workout' process? → A negotiated restructuring or repayment plan for a defaulted or distressed loan
7. Professional business analysts for credit risk should be knowledgeable in the following fields, except → Knowledge based
8. Which concentration risk measure captures the additional risk from having large exposures to a single counterparty or sector? → Herfindahl-Hirschman Index (HHI)
9. A bank uses the Standardized Approach for credit risk. A corporate loan with a BBB rating receives what risk weight under Basel III? → 100%
10. Which stress testing approach applies a single severe but plausible macroeconomic scenario to estimate portfolio credit losses? → Scenario analysis
11. Altman's Z-score model is primarily used to: → Predict corporate bankruptcy probability using financial ratios
12. Under CECL (Current Expected Credit Loss) accounting in the US, when must lifetime expected losses be recognized? → At loan origination, for the full expected life
13. Which technique involves assigning risk weights to off-balance-sheet commitments to convert them to credit risk equivalent on-balance-sheet exposures? → Credit Conversion Factor (CCF) application
14. What is the purpose of a 'stress test' in credit risk modeling? → To evaluate portfolio losses under severe but plausible adverse scenarios
15. What is a true statement about ratios? → Ratios are more useful when compared with previous years
16. Which Basel framework introduced the concept of Operational Risk capital charges? → Basel II
17. In credit risk modeling, what does a 'through-the-cycle' (TTC) rating approach primarily aim to achieve? → Remain stable across economic cycles by capturing long-run average risk
18. A portfolio exhibits a default correlation of 0.8 between two large borrowers. Compared to a correlation of 0.1, the higher correlation primarily: → Increases the portfolio's tail risk and unexpected loss
19. Which validation metric measures the area under the Receiver Operating Characteristic (ROC) curve? → AUROC (AUC)
20. What is 'cure rate' in credit risk management? → The proportion of defaulted loans that return to performing status
21. Which model is widely used for portfolio credit risk, treating default as driven by a single common factor? → Vasicek single-factor model
22. Which metric measures portfolio credit risk at a given confidence level over a specified horizon? → Credit VaR (Value at Risk)
23. What is the 'recovery rate paradox' in credit risk? → Recovery rates tend to be lower in downturns precisely when default rates are highest
24. What is the minimum Tier 1 capital ratio required under Basel III? → 6%
25. Which U.S. regulatory framework requires banks to conduct annual stress tests to assess capital adequacy? → Dodd-Frank Act (DFAST)
26. Which regulatory concept requires banks to hold additional capital above minimums based on their systemic importance to the financial system? → G-SIB surcharge
27. What is Risk-Adjusted Return on Capital (RAROC) used for in portfolio management? → Comparing risk-adjusted profitability across business lines or deals
28. What does the acronym 'DSCR' stand for in commercial real estate credit analysis? → Debt Service Coverage Ratio
29. In the context of credit scoring, what is the primary purpose of a 'scorecard reject inference' technique? → To estimate the performance of previously rejected applicants
30. What could be the causes of a decrease in net working capital? → All of the above