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Foundations of Financial Risk: An Overview of Financial Risk and Risk-based Financial Regulation, 2nd Edition by Christopher Donohue, Giacomo Indiveri, Richard Apostolik, GARP

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CHAPTER 4 Credit Risk

This and the following chapter provide a comprehensive introduction to credit risk: Chapter 4 focuses on the analysis of credit risk, and Chapter 5 explains the management of credit risks. This chapter addresses credit risk by focusing on three related topic areas. The first section introduces credit risk by defining and explaining the source of credit risk. The following sec­tions provide a detailed overview of lenders and borrowers, characteristics of credit products, and features of specific credit products used for retail and commercial lending. The final two sections describe the credit process and specifically credit analysis—how banks evaluate credit risk.

Chapter Outline

  • 4.1 Introduction to Credit Risk
  • 4.2 Lenders
  • 4.3 Borrowers
  • 4.4 Characteristics of Credit Products
  • 4.5 Types of Credit Products
  • 4.6 The Credit Process
  • 4.7 The Credit Analysis Process
  • 4.8 Information Services

Key Learning Points

  • One of a bank's core risks is the possibility that borrowers will not repay their loans on time, or at all.
  • Lenders distinguish between retail and commercial borrowers and tailor products to meet each group's unique financial needs.
  • Loan products can be characterized by maturity, repayment method, loan use, the different types of security the borrower needs to provide the lender (collateral), or the restrictions the borrower must agree to in order to obtain the loan (covenants).
  • There is a wide variety of credit products, and similar products can be used ...

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