MEASUREMENT OF CREDIT RISK
Chapter notes, video classes, MCQ practice tests and quick-revision one-liners for Risk Management (Elective) — CAIIB.
One-liners from this chapter
Free sample — 8 of 66 rapid-fire Q&A cards.
What does the Probability of Default (PD) measure in credit risk assessment?
PD measures the likelihood that a borrower will fail to meet their contractual debt obligations within a specified time horizon, typically one year.
What is the Default Mode in credit risk measurement used to estimate portfolio losses?
Model estimating losses only when obligors default.
How is Loss Given Default (LGD) defined under Basel framework?
LGD is the proportion of the exposure that is lost when a borrower defaults, expressed as a percentage of the Exposure at Default (EAD) after recovery of collateral and other mitigants.
What is the Mark-to-Market (MTM) mode in credit risk portfolio models?
Model capturing losses from credit quality deterioration, not just default.
What is Exposure at Default (EAD) in the context of credit risk measurement?
EAD is the total value of a credit exposure at the time a borrower defaults, including drawn amounts, accrued interest, and any undrawn committed facilities likely to be drawn.
What is the Loss Rate approach in measuring credit risk for a portfolio?
Estimating portfolio loss as a percentage of total exposure over time.
How is Expected Loss (EL) calculated using the three key credit risk parameters?
Expected Loss is calculated as EL = PD × LGD × EAD, representing the average credit loss a bank anticipates over a given period under normal business conditions.
What is the Actuarial Approach in credit risk measurement?
Statistical method using historical default rates to estimate future losses.
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