Credit Risk Management Professional 2

Question 1

Which regulatory framework introduced the Internal Ratings-Based (IRB) approach for calculating credit risk capital requirements?

Accepted Answer

Basel II

Answer

Basel II introduced the IRB approach, allowing banks to use internal models to estimate PD, LGD, and EAD for capital calculations.

Question 2

A bank's loan portfolio has an expected loss (EL) of $5M and unexpected loss (UL) of $20M. What is the primary purpose of economic capital in this context?

Accepted Answer

To cover the unexpected loss of $20M

Answer

Economic capital is held to absorb unexpected losses; expected losses are typically covered by loan loss provisions and pricing.

Question 3

In credit portfolio management, what does 'concentration risk' specifically refer to?

Accepted Answer

Excessive exposure to a single borrower, sector, or geography

Answer

Concentration risk arises when a portfolio has disproportionate exposure to a single counterparty, industry, or region, amplifying potential losses.

Question 4

Which metric measures the percentage of exposure recovered after a borrower defaults, net of collection costs?

Accepted Answer

Recovery Rate (RR)

Answer

Recovery Rate is the proportion of the outstanding balance recovered post-default; LGD equals 1 minus the recovery rate.

Question 5

A credit analyst uses a Merton structural model to assess default risk. What is the model's core assumption?

Accepted Answer

A firm defaults when its asset value falls below its debt obligations

Answer

The Merton model treats equity as a call option on the firm's assets, with default occurring when asset value drops below the debt face value at maturity.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Professional 2