Exam 11: Credit Risk: Loan Portfolio and Concentration Risk

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 can be interpreted as

On loans fully secured by physical, non-real estate loans, the Basel Committee has set a loss given defaults (LGD) rate of

Most portfolio managers will accept some level of risk above the minimum risk portfolio if they expect to receive higher returns.

What does Moody's Analytics Portfolio Manager Model use to identify the overall risk of the portfolio?

Portfolio risk can be reduced through diversification only if the returns of the loans in the portfolio are negatively correlated.

In applying the loan loss ratio models, the loss rate "β" for the whole loan portfolio is

In models that are based on loan loss ratios, a β that is found to be less than one for a particular loan sector indicates that

Comparing the loan mix of an individual FI to a national benchmark loan mix is useful in determining the extent that the individual FI may differ from an efficient portfolio composition.

Loan loss ratio models are based on historical loan loss ratios of specific sectors relative to the historic loan loss ratios of the FI's entire loan portfolio.