Bank Credit Management Chapter 2: Credit Risk Measurement

What is credit risk primarily concerned with?

The potential for a contractual party to fail to meet its obligations (correct)
The volatility of interest rates in the market
The liquidity of a company's assets
The performance of a company's shares

What are the three characteristics that define credit risk?

Exposure, probability of default, and recovery rate (correct)
Credit derivatives, credit risk management, and credit events
Performance risk, counterparty risk, and default risk
Exposure, interest rate, and recovery rate

What is the formula used to express credit risk?

Credit risk = Probability of default - Exposure + Recovery rate
Credit risk = Exposure × Probability of default × (1 - Recovery rate) (correct)
Credit risk = Exposure - Probability of default - Recovery rate
Credit risk = Recovery rate - Exposure - Probability of default

What is the primary goal of credit risk management?

To control the potential consequences of credit risk (D) Signup and view all the answers

What has led to the formalization of what constitutes credit events?

The development of credit derivatives (C) Signup and view all the answers

What is the relationship between exposure and credit risk?

The larger the exposure, the greater the credit risk (A) Signup and view all the answers

What type of risk is associated with lending to a particular country?

Country risk (B) Signup and view all the answers

What happens when a legal entity declares a standstill on its existing debts and interest payments?

Moratorium on debts (A) Signup and view all the answers

What is the term for when the legal entity is not able to or doesn't make the contractual payment?

Failure to pay (C) Signup and view all the answers

What is the term for when other obligations of the legal entity become due prior to maturity owing to a breach of contract?

Cross-acceleration (A) Signup and view all the answers

What is the term for when a debt is restructured to new credit conditions?

Restructuring (C) Signup and view all the answers

What is the term for when a government takes action against the creditor party?

Government action (D) Signup and view all the answers

What is the term for breaching contracts to accelerate payment of obligations?

Obligation acceleration (B) Signup and view all the answers

What is the consequence of a risk concentration?

A significant loss that threatens a bank's health (B) Signup and view all the answers

What is the primary goal of assessing credit risk?

To model the probability of a counterparty defaulting (B) Signup and view all the answers

What is settlement risk?

A sub-issue of credit risk that arises during the settlement process (D) Signup and view all the answers

What is repudiation in the context of credit risk?

A borrower's disaffirmation of their debt (D) Signup and view all the answers

What is the primary consideration for a credit manager when deciding whether to extend credit?

The potential loss from default (A) Signup and view all the answers

What type of risk arises from having exposure to individuals and institutions in countries with different legal systems and business codes?

Country risk (B) Signup and view all the answers

What is the primary concern for financial institutions that process a large number of high-value transactions?

Settlement risk (C) Signup and view all the answers

Which of the following is a factor relevant to country risk?

Enforcement risk from the debtor country (D) Signup and view all the answers

What is the main difference between political risk and economic risk?

Political risk arises from government challenges, while economic risk arises from economic instability (A) Signup and view all the answers

What is credit concentration risk?

The total credit risk characteristics at the portfolio level (A) Signup and view all the answers

Why is it sensible to question the quality of loans or credit to a country with declining economic stability?

Because the country's economy is declining (A) Signup and view all the answers