Credit Risk Management Trivia 2

Question 1

Which U.S. legislation established minimum capital requirements for banks and was a precursor to Basel accords?

Accepted Answer

FDICIA of 1991

Answer

The Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 introduced prompt corrective action and risk-based capital standards for U.S. banks.

Question 2

In credit risk modeling, what does a Gini coefficient closer to 1.0 indicate about a scoring model?

Accepted Answer

The model perfectly separates good and bad borrowers

Answer

A Gini coefficient near 1.0 means the model nearly perfectly ranks borrowers by default risk, indicating excellent discriminatory power.

Question 3

What credit risk term describes the phenomenon where borrowers with higher credit limits tend to default at lower rates?

Accepted Answer

Adverse selection

Answer

Adverse selection occurs when higher-risk borrowers disproportionately seek and obtain credit, while lower-risk borrowers tend to use less of their available credit.

Question 4

Which rating agency introduced the concept of 'notching' for structured finance instruments?

Accepted Answer

Moody's

Answer

Moody's pioneered notching—adjusting ratings up or down relative to issuer ratings—to reflect structural features of specific debt instruments.

Question 5

What is the typical holding period assumed when calculating Value-at-Risk for a trading book under Basel market risk rules?

Accepted Answer

10 days

Answer

Basel market risk rules assume a 10-business-day holding period for VaR calculations in the trading book, reflecting the time needed to liquidate positions.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Trivia 2