Risk Management & Credit Rating Part 1
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Advanced Bank Management — CAIIB.
One-liners from this chapter
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What is the primary objective of risk management in credit operations of a bank?
The primary objective is to identify, measure, monitor, and control credit risk to minimize potential losses while optimizing risk-adjusted returns on the loan portfolio.
What is the definition of 'risk' in the context of bank credit management?
Possibility of loss due to uncertain future events in lending.
How does Basel II define credit risk?
Basel II defines credit risk as the risk of loss arising from a borrower's failure to repay a loan or meet contractual obligations, encompassing default risk, migration risk, and spread risk.
What is a 'risk appetite' in the context of a bank's credit policy?
Maximum level of risk a bank is willing to accept for returns.
What is the difference between expected loss (EL) and unexpected loss (UL) in credit risk?
Expected Loss (EL) is the average loss a bank anticipates over a given period and is covered by loan pricing and provisions, whereas Unexpected Loss (UL) is the volatility around EL and must be covered by economic capital.
What is a 'rating outlook' assigned alongside a credit rating?
Indication of potential rating direction over medium term.
What are the three key components of Expected Loss (EL) in the credit risk framework?
Expected Loss = Probability of Default (PD) × Loss Given Default (LGD) × Exposure at Default (EAD), where each component quantifies a distinct dimension of credit risk.
What does the term 'credit spread' represent in bond markets?
Yield difference between a corporate bond and risk-free government bond.
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