Banking Chapter: Loan to Deposit Ratio and Capital Ratios

Credit risk

Credit risk is the possibility of financial loss due to the failure by a borrower to meet their payment obligations, and it relates to the risk of loss associated with loans provided to borrowers.

Credit risk, market risk, liquidity risk, and operational risk

<p>To provide an indication of the bank's liquidity as measured by the relative contribution of deposit funding</p> Signup and view all the answers

<p>To rate larger counterparties, assessing their creditworthiness</p> Signup and view all the answers

<p>The CET1 ratio is CET1 divided by RWA, and it measures the balance sheet strength of a bank as indicated by the level of capital supporting its asset base</p> Signup and view all the answers

<p>The assigned credit rating is the primary indicator of a borrower's credit profile, and a higher rating indicates a lower likelihood of credit default.</p> Signup and view all the answers

<p>Lenders need to perform their own assessment of credit risk because these entities are not typically rated by a ratings agency.</p> Signup and view all the answers

<p>The higher the quality of collateral assets, the less concerned the lender is about borrower default, as the assets can be sold to recoup outstanding funds.</p> Signup and view all the answers

<p>Counterparty default risk is the risk that a counterparty will not pay as required under a financial obligation, and it is a type of credit risk.</p> Signup and view all the answers

<p>Credit spread risk is the risk that the credit profile of a counterparty changes over time, affecting the value of a loan or bond issued by that counterparty.</p> Signup and view all the answers

<p>Concentration risk is the risk that arises due to excessive exposure to a counterparty, industry, or sector, and it can lead to significant losses in the event of default.</p> Signup and view all the answers

<p>Liquidity risk is the risk of being unable to meet payment obligations when they are due, and it arises in a bank due to differences in the maturity of assets and liabilities.</p> Signup and view all the answers

<p>Funding liquidity risk is the risk of not being able to raise sufficient funds to meet liabilities, while asset liquidity risk is the risk of not being able to sell assets without affecting prices.</p> Signup and view all the answers

<p>Managing liquidity risk is critical for a bank's solvency, as well as for the stability of the entire financial system.</p> Signup and view all the answers

<p>Operational risk is the risk of losses arising from the people, processes, or systems used within an institution, or from external factors.</p> Signup and view all the answers

<p>A bank's liquidity affects its ability to meet its payment obligations by determining whether it has available cash or can easily convert its assets into cash.</p> Signup and view all the answers

<p>A liquid asset is one that can be easily sold without affecting prices, while a liquid market is one in which assets can be easily bought and sold with little consequential impact on prices.</p> Signup and view all the answers