Credit Risk
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Bank Financial Management — CAIIB.
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Free sample — 8 of 92 rapid-fire Q&A cards.
Define credit risk in banking context.
Risk that counterparty fails to honour contractual obligation in full or part when due.
Name four sources where credit risk arises in banks.
Direct lending, guarantees/LCs, treasury derivatives, cross-border exposures.
What are the four pillars of credit risk management?
Identification, Measurement, Monitoring & Control, Mitigation.
Explain Default Risk and Loss Given Default (LGD).
Default Risk: borrower fails to pay promised amount. LGD = 1 − Recovery Rate.
What is Credit Spread Risk?
Risk from worsening credit quality; debt trades at higher yield over risk-free rate.
Distinguish counterparty risk from standard credit risk.
Counterparty risk: non-performance in trading; transient, mark-to-market, short-dated.
Define Country Risk in cross-border exposure.
Non-performance due to sovereign restrictions; sanctions or forex reserve crises blocking remittances.
What are credit ratings: deterministic or probabilistic?
Probabilistic. Large portfolio defaults align with ratings; individual accounts may deviate.
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