Which statement best distinguishes individual loan risk from portfolio-level credit risk

• individual risk considers borrower default correlations

• Individual risk focuses on one borrower; portfolio risk consider interactions among loans

• Portfolio risk ignores diversification benefits

• Portfolio risk only measures collateral value

Concentration risk most commonly arises when a bank's loan book is heavily exposed to which of the following?

• A wide variety of loan maturities but identical borrower credit scores

• Exposure to a cluster borrowers that are economically sensitive to the same shocks

• Diversification across numerous sectors

• A mix of loan products secured by different collateral types

A key danger of concentration risk is that it can:

• Increase sector-specific yield at the lower overall risk-adjusted returns

• Trigger multiple borrower defaults simultaneously, undermining diversification benefits and elevating systemic risk

• Reduce capital charges under Basel's internal ratings-based approach

• Encourage the use of advanced risk analytics to mask uncorrelated exposures

A bank lends heavily to one manufacturing sector. A global supply-chain hits that sector. What is the primary risk the bank faces

• Only borrower-specific default risk due to firm-level management issues

• Positive feedback loops of losses mitigated by internal credit rating upgrades

• Sector-wide borrower failures due to systemic shock propagation, leading to portfolio-level credit deterioration

• Risk dilution as expertise in one sector allows better monitoring of borrower performance

What does a loan migration loan matrix primarily help a bank to assess?

• Liquidity mismatches

• Collateral adequacy

• Credit quality shifts and default probabilities over time

• Asset-liabilities matching

What risk arises if a financial institution lends 55% of its portfolio to two highly correlated sectors like construction and real estate?

• Reduced operating costs

• Concentration risk from correlated performance

• Increase in capital surplus

• Lower expected returns

A key goal of concentration limits is to:

• Encourage short-term lending

• Increase lending to high yield borrowers

• Prevent overexposure to an one borrower, sector, or geography

• Eliminate the need for credit scoring

The collapse of SVB in 2023 was a result of

• One borrower defaulting a large loan

• Regulatory failure to detect fraud

• High concentration in tech loans and uninsured deposits

• Foreign currency risk exposure

Why did SVB's depositor base create systemic risk?

• Depositors were from multiple industries

• 90% were uninsured and from similar client types

• Depositors were mostly sovereign entities

• Depositors had diversified investment strategies

What feature of Modern Portfolio Theory (MPT) helps reduce portfolio risk?

• Investing only in short-term assets

• Combining assets with low or negative correlations

• Maximizing exposure to high-yield loans

• Using the same rating across all borrowers