Credit Risk Management Trivia 3

Question 1

What does the acronym 'DSCR' stand for in commercial real estate credit analysis?

Accepted Answer

Debt Service Coverage Ratio

Answer

Debt Service Coverage Ratio (DSCR) measures a property's net operating income relative to its annual debt payments, indicating ability to service debt.

Question 2

Under Basel III, what is the minimum Common Equity Tier 1 (CET1) capital ratio required for banks?

Accepted Answer

4.5%

Answer

Basel III requires banks to maintain a minimum CET1 ratio of 4.5% of risk-weighted assets, representing the highest quality capital buffer.

Question 3

Which credit risk concept refers to the tendency of credit quality to deteriorate as economic conditions worsen?

Accepted Answer

Procyclicality

Answer

Procyclicality describes how credit risk measures like PDs and capital requirements tend to increase during downturns, potentially amplifying economic cycles.

Question 4

What is a 'zombie loan' in banking terminology?

Accepted Answer

A non-performing loan kept on books to avoid recognizing losses

Answer

Zombie loans are non-performing loans that banks continue to carry on their books rather than writing off, often to avoid recognizing losses that would impair capital.

Question 5

In credit risk, what is the purpose of a 'haircut' applied to collateral?

Accepted Answer

To account for potential decline in collateral value during liquidation

Answer

A haircut reduces the recognized value of collateral below its market value to account for potential price declines, liquidity costs, and uncertainty during forced liquidation.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Trivia 3