Credit Risk Management Trivia 5

Question 1

What credit risk term describes a borrower who is current on payments but whose underlying financials suggest elevated future default risk?

Accepted Answer

Special mention

Answer

'Special mention' (or 'criticized') assets are loans where borrowers show potential weaknesses that, if uncorrected, may weaken the credit or jeopardize repayment.

Question 2

In the Merton structural model of credit risk, default occurs when the firm's asset value falls below what threshold?

Accepted Answer

The face value of the firm's debt

Answer

In the Merton model, default is triggered when the market value of the firm's assets falls below the face value of its outstanding debt at maturity.

Question 3

What is a 'covenant-lite' loan, and why does it concern credit risk managers?

Accepted Answer

A leveraged loan with fewer financial maintenance covenants, giving lenders less early warning of deterioration

Answer

Covenant-lite loans lack traditional maintenance covenants (like leverage ratio tests), so lenders lose early warning signals and the ability to intervene before default becomes likely.

Question 4

Which regulatory concept requires banks to hold additional capital above minimums based on their systemic importance to the financial system?

Accepted Answer

G-SIB surcharge

Answer

The Global Systemically Important Bank (G-SIB) surcharge requires the largest, most interconnected banks to hold 1-3.5% additional CET1 capital above Basel III minimums due to their systemic risk.

Question 5

What is 'concentration risk' in a loan portfolio, and how is it typically managed?

Accepted Answer

Risk of excessive exposure to a single borrower, industry, or geography; managed through diversification limits

Answer

Concentration risk arises when a portfolio has outsized exposure to a single counterparty, sector, or region, and is managed through exposure limits, diversification, and credit risk transfers.

Credit Risk Management Practice Test

Credit Risk Management Practice Test

Credit Risk Management Trivia 5