Credit risk for financial institutions: what you should know [Blog post]

Bace, Edward ORCID: https://orcid.org/0000-0003-4452-0350 (2018) Credit risk for financial institutions: what you should know [Blog post]. Bloomberg Exam Prep - CFA Program. [Other]

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Abstract

Risk management is an important feature of the CFA® exams. Since many candidates work for or aspire to work for banks, an understanding of credit risk is critical, simply because credit risk is the main risk-exposure element of the vast majority of banks in any country. Take a look, for example, at the following extract from the banking book of an Austrian regional bank, with a balance sheet around EUR 10,000,000,000. It shows its November 2014 regulatory capital requirement breakdown:

* Credit risk: 92%
* Other: 1%
* Operational risk: 1%
* Market risk: 6%

This shows credit risk to be the highest material risk exposure on the balance sheet. This is by no means an extreme example, and amply illustrates the point.

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