Credit Risk Management Lecture Notes

A collection of essential terms and definitions related to credit risk management to assist students in their exam preparation.

Credit Risk

The risk of default on a debt that may arise from a borrower failing to make required payments.

Lender

The party that provides funds to a borrower in a lending operation.

Borrower

The party that receives funds from a lender and promises to repay with interest.

Loan Default

Failure of a borrower to meet the legal obligations of a loan.

Credit Default Swap (CDS)

A financial swap agreement in which the seller will compensate the buyer in the event of a default.

Technical Default

A deficiency in a loan agreement arising from failure to uphold an aspect of the loan terms.

Collateral

An asset pledged by a borrower to secure a loan.

Counterparty Credit Risk

The risk that the other party in a financial transaction defaults.

Expected Loss (EL)

The average loss a lender expects to incur on a loan default.

Probability of Default (PD)

The likelihood that a borrower will default on a loan.

Loss Given Default (LGD)

The proportion of the total exposure that a lender loses in the event of a default.

Exposure at Default (EAD)

The total value that a lender is exposed to at the time of default.

Risk-Weighted Assets (RWA)

A bank's assets weighted according to credit risk.

Basel Accords

International banking regulations that set forth standards for capital risk, market risk, and operational risk.

Internal Ratings-based Approach (IRB)

A method banks use to calculate regulatory capital requirements based on their own internal risk assessments.

Six Types of Credit Risk

Traditional default risk, counterparty pre-settlement risk, counterparty settlement risk, country risk, legal risk, concentration risk.

Credit Scoring

A statistical analysis performed by lenders and financial institutions to assess a person's creditworthiness.

Credit Rating

An evaluation of the credit risk of a prospective debtor.

Debt Collection Agency

A company that pursues payments of debts owed by individuals or businesses.

Recovery Rate

The amount of money that is expected to be recovered from a loan that is in default.

Financial Contagion Effect

The spread of financial instability or economic downturn from one market or institution to others.

Subprime Lending

The practice of providing loans to borrowers with lower credit ratings.