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Chapter 6: Credit Risk - Coggle Diagram
Chapter 6: Credit Risk
Overview
Risk of loss from borrower default
Occurs when future cash flows are used to pay current debts
Compensation: Interest payments
Importance of Credit Risk Management
Identify, measure, and treat risks
Comply with Basel II standards
Differentiate good vs. bad customers
Credit Ratings
Assess borrower’s credit quality
Agencies: S&P, Moody’s, Fitch
Rating Scales:
AAA = Prime
AA = High Grade
A = Upper Medium
BBB = Lower Medium
Below BBB = Speculative
Key Concepts
Default Probability (PD) → chance borrower fails to pay
Loss Given Default (LgD) → portion lost if default occurs
Formula: (Exposure – Recovery) / Exposure
Exposure at Default (EaD) → total value exposed to risk
EaD = Current Exposure + Potential Future Exposure