The Building Blocks of Credit Analysis 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 4 in The Practice of Lending, 2020, pp 125-182 from Springer

Abstract: Abstract This chapter fleshes out the borrower risk rating (BRR) components, and demonstrates the calculation of component and composite BRRs. A BRR scorecard would usually have four main building blocks: Industry Risk, Business Risk, Management Risk, and Financial Risk. Each block is usually defined by a set of Risk Factors and a set of Risk Elements, all weighted. The chapter discusses methods to dampen point-in-cycle effects on the BRR and the conditions that require the use of projected financial statements instead of current for more accurate BRR determination. The chapter provides a framework for creating descriptors/characteristics (for a given risk factor/risk element) to differentiate between risk ratings effectively and consistently. The monotonicity between descriptor and BRR is a necessary condition of a predictive risk-rating system.

Keywords: Building block; Industry/Business/Management/Financial risk; Point-in-cycle; Through-the-cycle; Monotonicity (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_4

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DOI: 10.1007/978-3-030-32197-0_4

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