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    Credit Risk Interview Questions

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    Dipti Kamble
    Credit risk refers to the potential that a borrower will default on repayments. It is calculated using probability of default (PD), exposure at default (EAD), and loss given default (LGD). Expected loss (EL) is computed as EL = LGD * EAD * PD. The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to ensure financial institutions have sufficient capital. Model validation involves testing a model's construction and performance, while development includes variable selection, sampling, and selecting a champion model.

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    Credit Risk Interview Questions

    Uploaded by

    Dipti Kamble
    3K views2 pages
    Credit risk refers to the potential that a borrower will default on repayments. It is calculated using probability of default (PD), exposure at default (EAD), and loss given default (LGD). Expected loss (EL) is computed as EL = LGD * EAD * PD. The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to ensure financial institutions have sufficient capital. Model validation involves testing a model's construction and performance, while development includes variable selection, sampling, and selecting a champion model.

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    Credit risk refers to the potential that a borrower will default on repayments. It is calculated using probability of default (PD), exposure at default (EAD), and loss given default (LGD). Expected loss (EL) is computed as EL = LGD * EAD * PD. The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to ensure financial institutions have sufficient capital. Model validation involves testing a model's construction and performance, while development includes variable selection, sampling, and selecting a champion model.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    3K views2 pages

    Credit Risk Interview Questions

    Uploaded by

    Dipti Kamble
    Credit risk refers to the potential that a borrower will default on repayments. It is calculated using probability of default (PD), exposure at default (EAD), and loss given default (LGD). Expected loss (EL) is computed as EL = LGD * EAD * PD. The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to ensure financial institutions have sufficient capital. Model validation involves testing a model's construction and performance, while development includes variable selection, sampling, and selecting a champion model.

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    1. How do you define a default for retail portfolio (personal loan, auto loan etc.

    ) and
    mortgage portfolio?

    Ans: for Retail 90 DPD (Days past due) or 60 DPD + Bankruptcy

    For Mortgage 180 DPD

    2. What is LGD, EAD, PD?

    Ans: Loss given default (LGD) is the amount of money a bank or other financial institution
    loses when a borrower defaults on a loan. The most frequently used method to calculate
    this loss compares actual total losses to the total amount of potential exposure sustained at
    the time that a loan goes into default. In most cases, LGD is determined after a review of a
    bank’s entire portfolio, using cumulative losses and exposure for the calculation.

    Exposure at default (EAD) is the total value a bank is exposed to at the time of a loan’s
    default. Using the internal ratings-based (IRB) approach, financial institutions calculate their
    risk. Banks often use internal risk management default models to estimate respective EAD
    systems. Outside of the banking industry, EAD is known as credit exposure.

    PD is probability of default.

    3. How do you compute EL (Expected Loss)?

    Ans: EL = LGD * EAD * PD

    4. What is CCAR?

    Ans: The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the
    Federal Reserve to ensure that institutions have well-defined and forward-looking capital
    planning processes that account for their unique risks and sufficient capital to continue
    operations through times of economic and financial stress.

    5. What are steps involved in model development / validation?

    Ans: Validation

    a. Review and understanding of model documentation.


    b. Replication of model parameters and various test performed
    c. Test the construction (Conception soundness of technique) and control (monitoring)
    of the model
    d. Perform new tests
    e. Write model validation report

    Development

    a. Preparing development sample (collecting data, performing EDA ( outlier, missing


    value treatment)
    b. Sampling
    c. Variable Selection
    d. Champion model selection
    e. Check Perfomance and stability of model
    f. Documentation

    For internal use only


    6. What are the technique involved in variable selection for scorecard model?
    Ans: Weight of Evidence
    Information value
    PCA / Factor Analysis
    Correlation analysis
    Backward / forward / stepwise selection
    Judgement analysis
    7. What are techniques used for model development?
    Ans: Logistic Regression, Linear Regression, Decision Tree, Random Forest, ARIMA
    8. Explain Logistic Regression
    Ans: In statistics, the logistic model (or logit model) is a statistical model that is usually
    taken to apply to a binary dependent variable. In regression analysis, logistic regression
    or logit regression is estimating the parameters of a logistic model.

    9. What is difference between HELOC and HELOAN?

    HELOC Home Equity Line of Credit – works as credit card, you can draw funds whenever
    needed

    HELOAN Home Equity Loan works as a normal home loan

    10. What is Credit Risk?

    Ans: Credit risk is the probable risk of loss resulting from a borrower's failure to repay a loan
    or meet contractual obligations.

    For internal use only

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