Scribd
Upload
4K views2 pages

Credit Risk Interview Questions

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.

Uploaded by

Dipti Kamble
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
4K views2 pages

Credit Risk Interview Questions

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.

Uploaded by

Dipti Kamble
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

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

You might also like