Chapter 28: Management of credit risk

Question 1

The stages in the credit risk management process PREG P

Answer 1

• Policy and infrastructure MEDI SAM
• Review of credit
• Exposure monitoring, management and reporting
• Granting of credit CAPS
• Portfolio management

Question 2

Components of credit Policy and infrastructure creation MED MARS

Answer 2

o Methodologies developed
o Environment for credit created
o Data standards and conventions defined
o Model development ensured
o Adoption of policies ensures
o Review policies regularly
o Systems developed

Question 3

Components of Credit granting CAPS

Answer 3

o Contracting
o Approval
o Pricing
o Scoring

Question 4

Purpose of exposure monitoring DEUR

Answer 4

o Diversification ensured
o Early warning of adverse credit events
o Undue exposure prevented
o Reporting of credit risk (existing list on reporting)

Question 5

Purpose of risk limits CARD

Answer 5

o Control on risk exposure ensured
o Allocation of risk bearing capacity
o Regulatory compliance
o Delegation of authority

Question 6

The benefits of portfolio management CORN

Answer 6

o Capital freed up
o Optimize risk exposure
o Reduce and eliminate unwanted risk
o New target markets opened up

Question 7

Components of the credit review DUPS

Answer 7

o Data samples assessed
o Underwriting standards enforced
o Policy and procedure checks
o System testing

Question 8

Benefits of credit insurance BITE E

Answer 8

 Bad debt cover
 Incidental credit covered
 Terms of financing improved
 Expense cover
 International and domestic trade covered
 Exchange rate losses

Question 9

Benefits of securitization RASPER

Answer 9

o Raise liquidity
o Alternative financing
o Sell credit exposure to a new market
o Pass risk
o Exposure to a client can be increased
o Reduce capital requirements

Question 10

Features of credit risk reporting RATE

Answer 10

o Risk-adjusted returns
o Aggregations or risk
o Trends
o Exceptions

Question 11

Elements of scoring MACER

Answer 11

 Modelling and judgement applied
 Affordability of borrower considered
 Collateral of borrower considered
 Efficiency and effectiveness balanced
 Regular review of borrower

Question 12

Best practice credit risk management TICA

Answer 12

o Tools used are sophisticated
o Individual and portfolio level risk management
o Culture of credit risk
o Active portfolio management

Question 13

Credit default swaps PRICS

Answer 13

 Physical or cash settlement
 Right to sell bond on default event
 Internal credit limit with client met
 Credit risk transferred by exposure retained
 Sale price = face value – recovery value