CCP Foundation Level

Credit Risk Management flashcards

Read the question, say the answer to yourself, then turn the card to check. The first 10 of 50 cards are free; the rest come with the subject.

Card 1 of 50

Jump to a card

Complete Flashcard Reference

Review every card in this deck. Open any card to reveal its answer. The first 10 are free; the other 40 come with the subject.

What is risk, and what two dimensions does it combine in a business context?

Risk is the possibility that an actual outcome will differ from what was expected, in a way that could cause loss or harm. It combines the likelihood of an adverse event occurring and the size of its impact if it does.

What is credit risk?

The risk of financial loss arising from a borrower or counterparty failing to meet its contractual obligations, in full or on time. The obligation may be repaying a loan, honouring a trade credit account, or settling any other financial commitment.

How is expected loss calculated? Work it for PD 5%, LGD 40% and EAD KES 1,000,000.

Expected loss (EL) = probability of default (PD) x loss given default (LGD) x exposure at default (EAD). EL = 0.05 x 0.40 x 1,000,000 = KES 20,000. LGD is 1 minus the recovery rate, so here the lender expects to recover 60%.

What are the five C's of credit?

Character, Capacity, Capital, Collateral and Conditions. It is the base framework that CAMPARI and CCCPARTS build on.

What is the difference between credit risk appetite and credit risk culture?

Risk appetite: the level and type of credit risk an organisation is willing to accept in pursuit of its objectives, formally set by the board and turned into limits and policy. Risk culture: the shared values, attitudes and behaviours toward risk, whether staff genuinely follow credit discipline or treat policy as a formality to work around.

How do you tell a firm's business (operating) risk from its financial risk?

Business risk concerns how the firm operates: weak demand, poor cost control, dependence on few customers or suppliers, weak management, competitive or technological pressure. Financial risk concerns how the firm is financed: high gearing, weak liquidity, volatile profit and cash flow, unhedged interest rate or currency exposure, maturity mismatch.

How does credit risk move through the business cycle?

Default rates typically rise in a downturn, as borrowers' revenues fall and unemployment rises, and fall in an upturn. So a lender's credit book carries systematically more risk at some points in the cycle than others.

How does credit risk change across the four stages of the industry life cycle?

Introduction: new and unproven; high risk and high uncertainty over survival. Growth: demand and profitability expand; risk falls as the industry proves itself. Maturity: stable, slower growth; risk is typically at its lowest. Decline: shrinking demand; risk rises again as firms compete for a smaller market.

In a SWOT analysis of a borrower, which elements are internal and which are external?

Internal: strengths (such as a strong brand or skilled staff) and weaknesses (such as weak systems, limited capital or dependence on one product). External: opportunities (such as a growing market) and threats (such as new competition, adverse regulation or an economic downturn). In a credit analysis, tie each point back to repayment capacity.

What is the difference between qualitative and quantitative risk mitigations?

Qualitative: non-numeric responses, such as tighter covenants, closer monitoring, requiring specific management actions, or declining the application. Quantitative: measurable responses, such as additional security or collateral, a lower credit limit, a higher risk-adjusted price, or credit insurance.

What are the five steps of the risk management process, in order?