Credit Risk Management Credit Risk Management MCQ 3

Question 1

Which risk mitigation technique involves transferring the first loss tranche of a loan portfolio to investors through a structured product?

Accepted Answer

Collateralized Loan Obligation (CLO)

Answer

A CLO securitizes a pool of loans and sells tranches to investors, transferring first-loss and other risk layers away from the originating bank.

Question 2

What does a 'wrong-way risk' exposure in counterparty credit risk describe?

Accepted Answer

An exposure where collateral value is negatively correlated with counterparty creditworthiness

Answer

Wrong-way risk occurs when exposure to a counterparty is positively correlated with their probability of default, increasing loss severity.

Question 3

A bank uses the Standardized Approach for credit risk. A corporate loan with a BBB rating receives what risk weight under Basel III?

Accepted Answer

100%

Answer

Under the Basel III Standardized Approach, unrated and BBB-rated corporate exposures generally receive a 100% risk weight.

Question 4

What is the primary purpose of a loan covenant in credit risk management?

Accepted Answer

To provide early warning triggers that protect the lender if the borrower's financial health deteriorates

Answer

Covenants are contractual conditions that give lenders early-warning signals and remedies if a borrower's financial position weakens.

Question 5

In stress testing a credit portfolio, what is the primary objective of a 'reverse stress test'?

Accepted Answer

To work backwards from a predefined failure outcome to find scenarios that could cause it

Answer

Reverse stress testing starts with a catastrophic outcome (e.g., insolvency) and identifies what scenarios could plausibly cause it.

Credit Risk Management Practice Test