Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

Use the following information to answer questions 61-: National Benchmark Bank A Bank B Consumer Loans 50 percent 65 percent 35 percent Commercial Loans 50 percent 35 percent 65 percent [Reference: 11-66] -Estimate the standard deviation of Bank A's asset allocation proportions relative to the national benchmark.

In the Moody's Analytics portfolio model, the expected loss on a loan is

In the use of modern portfolio theory (MPT), the sum of the credit risks of loans under estimates the risk of the whole portfolio.

A regression of sectoral loan losses against total loans losses, both measured as a percentage of total loans, of a bank results in the following beta coefficients for the real estate (RE) and commercial (CL) loan variables: β_RE = 1.2, β_CL = 1.6.The intercept for both regressions is zero. The results indicate that for the bank

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans.The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments.For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. Suppose Kansas Bank wants to ensure that its maximum loss on a secured (collateralized) loan is 10 percent (as a percent of capital).If it wishes to keep a concentration limit at 40 percent for secured loans, what is the estimated amount lost per dollar of defaulted secured loan?

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans.The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments.For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a % of capital) for secured loans made by this bank?

Using standard deviations, which bank is in a better position if the average earnings on the assets of Bank A is 11 percent and Bank B is 12 percent (ignore all other factors)?

Banks whose loan portfolio composition deviates from the national benchmark should immediately implement policies to move toward benchmark alignment.

If the amount lost per dollar on a defaulted loan is 40 percent, then a bank that does not permit the loss of a loan to exceed 10 percent of its bank capital should set its concentration limit (as a percentage of capital) to

As part of measuring unobservable default risk between borrowers, the Moody's Analytics model decomposes asset returns into

What is the FI's expected return on its loan portfolio?

Any model that seeks to estimate an efficient frontier for loans, and thus the optimal proportions in which to hold loans made to different borrowers, needs to determine and measure the

Recent Federal Reserve policy for measuring credit concentration risk favors technical models over subjective analysis.

Using migration analysis, a loan officer tracks credit rating agencies as well as their own internal models to help determine appropriate amounts to lend to certain sectors or classes.

One advantage of portfolio diversification methods is that they are applicable to all FIs, regardless of their size.

Kansas Bank has a policy of limiting their loans to any single customer so that the maximum loss as a percent of capital will not exceed 20 percent for both secured and unsecured loans.The limit has been adopted under the assumption that if the unsecured loan is defaulted, there will be no recovery of interest or principal payments.For loans that are secured (collateralized), it is expected that 40 percent of interest and principal will be collected. What is the concentration limit (as a percent of capital) for unsecured loans made by Kansas Bank?

A systematic loan loss risk is based on historic loss ratios and is a measure of the sensitivity of loan losses in a particular business sector relative to the losses in and FI's loan portfolio.

Included in the Moody's Analytics model are recovery rates on defaulted loans.

The concentration limit method of managing credit risk concentration involves estimating the minimum loan amount to a single customer as a percent of capital.

In the Moody's Analytics model, which of the following is a function of the historical returns of the individual assets.