Credit Risk Management Credit Risk Management MCQ 4

Question 1

Under IFRS 9, which stage classification applies to financial assets that have experienced a significant increase in credit risk since origination but have not yet defaulted?

Accepted Answer

Stage 2

Answer

Stage 2 under IFRS 9 applies to assets with a significant increase in credit risk, requiring lifetime expected credit loss provisioning.

Question 2

A borrower's Debt Service Coverage Ratio (DSCR) is 0.85. What does this indicate for a lender?

Accepted Answer

The borrower cannot cover debt service from operating cash flows, increasing default risk

Answer

A DSCR below 1.0 means operating income is insufficient to cover debt payments, signaling elevated credit risk.

Question 3

Which statistical model estimates the probability of default by regressing binary default outcomes against borrower characteristics?

Accepted Answer

Logistic regression

Answer

Logistic regression models the probability of a binary outcome (default/non-default) as a function of borrower financial variables.

Question 4

In a collateralized lending arrangement, 'haircut' refers to:

Accepted Answer

The percentage reduction applied to the market value of collateral to determine its lending value

Answer

A haircut reduces the accepted value of collateral below its market value to buffer against price volatility and forced-sale risk.

Question 5

What is the key distinction between 'incurred loss' (IAS 39) and 'expected loss' (IFRS 9) provisioning models?

Accepted Answer

Expected loss provisions are recognized earlier — at origination — rather than waiting for a loss event to occur

Answer

IFRS 9's expected loss model requires banks to provision for credit losses from day one, whereas IAS 39 required a triggering loss event first.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Credit Risk Management MCQ 4