Credit Risk Quizz

What is credit risk?

• Possibility of economic loss due to customers not paying their debts to the entity

• Possible loss derived from making decisions of a strategic or business nature

• Risk of assets value loss as a result of the customers insolvency

• A and C answers are correct

Which types of risks are included in Pillar I?

• Credit, Market and Operational

• Credit, Market and Liquidity

• Credit and Market

• Credit, Market, Operational and Legal

Which parameters allow the estimation of the unexpected loss?

• Probability of default (PD) and severity (LGD)

• Exposure at default (EAD) and PD

• The EAD, the LGD and the expected Losses

• None of the above

Which of the following approaches apply when calculating capital requirements for Credit Risk?

• As per Basel III, all entities have to apply the same approach when estimating capital requirements for Credit Risk

• Standard, Foundation IRB and Advanced IRB

• Statistical and expert

• Standard, Internal and VaR

The entities that calculate the unexpected loss under the foundation approach...

• Estimate the PD with internal models and receive from the regulator the rest of the parameters

• Receive from the regulator estimates of all the risk parameters to calculate regulatory capital but they make their own estimates to calculate economic capital

• Estimate the LGD with internal models and receive from the regulator the rest of the parameters

• None of the above

Select the incorrect statement regarding the criteria to select a final model:

• The weight of the variables in the model must be heterogeneously distributed

• Variables will need to be relevant and easy to understand from a business point of view

• Variables will provide the highest predictive power as a whole and will avoid redundant information

• The sensitivity analysis must confirm the outcomes’ robustness

In a perfect model, which value does the ROC take?

• 0

• 1.5

• 1

• 0.5

When selecting variables for a model, it is not important that:

• They cover the profiles that you want to reflect

• They avoid redundancy

• Provide the greatest joint predictive power

• Include a large number of them

What is the EAD of a credit line with a PD of 5%, LGD of 40% and CCF of 60%, if the average used amount is £250.000and limit is £1.250.000?

• 340,000

• 900,000

• 850,000

• 18,000

What is the expected loss of a portfolio if the probability of default is 25% and the severity is 20%?

• 5%

• 0.05%

• 50%

• 0.5%