5530 Ch11
Chapter 11: 4, 7, 8, 10, 11, 12, 14, 15, 18, 20, 21, 22, 23, 24, 26, 27
Chapter Eleven
Credit Risk: Individual Loan Risk
Chapter Outline
Introduction
Credit Quality Problems
Types of Loans
• Commercial and Industrial Loans • Real Estate Loans • Individual (Consumer) Loans • Other Loans
Calculating the Return on a Loan
• The Contractually Promised Return on a Loan • The Expected Return on a Loan
Retail versus Wholesale Credit Decisions
• Retail • Wholesale
Measurement of Credit Risk
Default Risk Models • Qualitative Models • Quantitative Models
Summary
Appendix 11A: Credit Analysis (www.mhhe.com/saunders7e)
Appendix 11B: Black-Scholes Option Pricing Model (www.mhhe.com/saunders7e)
Solutions for End-of-Chapter Questions and Problems
1. Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of credit risk assessment more difficult for both FI managers and regulators?
Credit risk management is important for FI managers because it determines several features of a loan: interest rate, maturity, collateral and other covenants. Riskier projects require more analysis before loans are approved. If credit risk analysis is inadequate, default rates could be higher and push a bank into insolvency, especially if the markets are competitive and the margins are low.
Credit risk management has become more complicated over time because of the increase in off-balance-sheet activities that create implicit contracts and obligations between prospective lenders and buyers. Credit risks of some off-balance-sheet products such as loan commitments, options, and interest rate swaps, are difficult to assess because the contingent payoffs are not deterministic, making the pricing of these products complicated.
2. Differentiate between a secured and an unsecured loan. Who bears most of the risk in a
Chapter Eleven
Credit Risk: Individual Loan Risk
Chapter Outline
Introduction
Credit Quality Problems
Types of Loans
• Commercial and Industrial Loans • Real Estate Loans • Individual (Consumer) Loans • Other Loans
Calculating the Return on a Loan
• The Contractually Promised Return on a Loan • The Expected Return on a Loan
Retail versus Wholesale Credit Decisions
• Retail • Wholesale
Measurement of Credit Risk
Default Risk Models • Qualitative Models • Quantitative Models
Summary
Appendix 11A: Credit Analysis (www.mhhe.com/saunders7e)
Appendix 11B: Black-Scholes Option Pricing Model (www.mhhe.com/saunders7e)
Solutions for End-of-Chapter Questions and Problems
1. Why is credit risk analysis an important component of FI risk management? What recent activities by FIs have made the task of credit risk assessment more difficult for both FI managers and regulators?
Credit risk management is important for FI managers because it determines several features of a loan: interest rate, maturity, collateral and other covenants. Riskier projects require more analysis before loans are approved. If credit risk analysis is inadequate, default rates could be higher and push a bank into insolvency, especially if the markets are competitive and the margins are low.
Credit risk management has become more complicated over time because of the increase in off-balance-sheet activities that create implicit contracts and obligations between prospective lenders and buyers. Credit risks of some off-balance-sheet products such as loan commitments, options, and interest rate swaps, are difficult to assess because the contingent payoffs are not deterministic, making the pricing of these products complicated.
2. Differentiate between a secured and an unsecured loan. Who bears most of the risk in a