The Criteria-Based Approach to Credit Risk Assessment and Credit Risk Rating

Terence M. Yhip and Bijan M. D. Alagheband
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Terence M. Yhip: University of the West Indies
Bijan M. D. Alagheband: McMaster University and Hydro One Networks Inc.

Chapter 3 in The Practice of Lending, 2020, pp 95-123 from Springer

Abstract: Abstract This chapter gives a general description of the framework of a risk-rating system that meets the requirements of the AIRB approach. The structure consists of a standard risk-rating scale that maps risk grades against probability of default. Consistent with the risk-rating scale, the criteria-based model, as represented by a borrower risk rating (BRR) scorecard, calculates a composite score and assigns a corresponding BRR based on the risk criteria, risk factors, risk elements, and descriptors appropriate to the industry under review. Thus in principle there can be as many BRR scorecards as there are industries in a loan portfolio. An important feature of the criteria-based approach is its override functionality. The chapter explores a method to capture information asymmetry or fraudulent financial reporting in the BRR.

Keywords: Criteria-based approach; Risk criteria; Risk factors; Risk elements; Descriptors; Override functionality (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-030-32197-0_3

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DOI: 10.1007/978-3-030-32197-0_3

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