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 65 rapid-fire Q&A cards.
What is credit risk in banking?
Credit risk is the risk of loss arising from a borrower's failure to repay a loan or meet contractual obligations, leading to financial loss for the lender.
What is the difference between obligor risk and facility risk in credit assessment?
Obligor risk relates to borrower; facility risk relates to specific loan terms.
How does the Basel II framework classify credit risk?
Basel II classifies credit risk under Pillar 1 (minimum capital requirements) and prescribes three approaches: Standardised Approach, Foundation IRB, and Advanced IRB for its measurement.
What is the Basel III capital requirement for credit risk under the Standardised Approach?
Risk-weighted assets multiplied by minimum capital ratio of 8%.
What is the Standardised Approach to credit risk under Basel?
Under the Standardised Approach, risk weights are assigned to exposures based on ratings from external credit rating agencies (ECAIs) recognised by the regulator, such as CRISIL or ICRA in India.
What is the Foundation IRB approach for credit risk measurement?
Banks estimate PD internally; LGD and EAD are set by regulators.
What does PD stand for in credit risk modelling?
PD stands for Probability of Default, which is the likelihood that a borrower will default on their debt obligations within a specified time horizon, typically one year.
What is the Advanced IRB approach for credit risk?
Banks estimate PD, LGD, and EAD internally using own data.
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