Banks and Credit Finance

Flashcards providing definitions for key terms related to banks and credit finance, credit risk, and its management, measurement, and mitigation.

Credit Risk

The potential financial loss a bank faces when a borrower fails to repay a loan, including complete default and partial loss.

Non-Performing Loans

Loans that tie up a bank's capital, reduce its ability to generate liquid assets, and can lead to concerns about credit quality.

Concentration Risk

Excessive exposure of a bank to a single borrower, industry, or geographic region.

Underwriting Process

A comprehensive process banks use to evaluate credit risk by analyzing borrower credit-worthiness.

5 C's of Credit

A historical framework used by banks to review credit quality, consisting of Character, Capacity, Capital, Collateral, and Conditions.

Probability of Default (PD)

A tool used by banks to measure credit risk, estimating the likelihood of a borrower failing to repay a loan.

Loss Given Default (LGD)

A tool used by banks to measure credit risk, estimating the percentage of loss a bank would incur if a borrower defaults.

Exposure at Default (EAD)

A tool used by banks to measure credit risk, representing the outstanding amount of a loan when a default occurs.

Credit Derivatives

Financial instruments sometimes used by banks to hedge credit risk.

Loan Syndication

A credit risk mitigation strategy where multiple lenders share large loan exposures.

Allowance for Credit Losses (ACL)

Reserves that banks must maintain to absorb expected losses in their loan portfolio.

Regulatory Capital

Capital required by regulatory bodies, which is directly reduced by credit losses.

Basel III

A regulatory framework that governs credit risk management, including capital requirements and stress testing mandates for banks.

Credit Risk Culture

A strong organizational environment for effective credit risk management, originating from board and upper-level management.

Allowance for Loan and Lease Losses (ALLL)

Reserves set aside by banks for loan losses, which reduces the net value of loans on the asset side of the balance sheet and overall capital.

Risk Weighted Assets

Assets whose value is adjusted for credit risk, used by banks to calculate required capital ratios under regulations like Basel III.

Credit Cycle Management

The process where banks adjust their balance sheet based on credit cycle dynamics and macroeconomic conditions influencing borrower creditworthiness.

Stress Testing

A method used by banks to analyze how different adverse economic conditions influence their credit portfolios and capital positions.

Scenario Analysis

A method used alongside stress testing to evaluate the impact of various economic conditions on a bank's credit portfolios and capital.