Question 1

What is the difference between external and internal credit ratings?

Accepted Answer

External ratings are issued by agencies like Moody's, S&P, and Fitch for entities with publicly traded instruments. Internal ratings are developed by banks to assess their own borrowers who may not have external ratings. The course explains the rating scales, the delineation within each grade (e.g., A1, A2, A3 for Moody's), and the distinction between investment grade and non-investment grade.

Question 2

What sources of country risk does the course cover?

Accepted Answer

The course covers political risk (democracy vs. dictatorship, policy continuity), corruption, physical violence, economic growth (real vs. nominal GDP), and the economic growth lifecycle of developing versus developed countries. It uses specific examples such as Mexico's GDP decline during the 2007-2009 recession compared to the US.

Question 3

What is the relationship between expected loss, unexpected loss, and economic capital?

Accepted Answer

Expected loss is calculated using traditional risk models. Unexpected loss can exceed expected loss significantly during stress periods. Banks set aside credit reserves for expected losses and hold economic capital as a buffer for unexpected losses. The course explains how economic capital differs from regulatory capital set by the Basel Committee.

Question 4

How do the Basel accords relate to credit risk measurement?

Accepted Answer

Basel I (1996) set minimum capital requirements for banks. Basel II (2004) introduced two approaches for credit risk capital: the standardised approach (using external ratings) and the internal ratings-based approach (using banks' own models). Basel III further strengthened these requirements. The course explains the evolution and practical differences between these frameworks.

Question 5

What does credit contagion mean?

Accepted Answer

Credit contagion refers to the pattern where defaults increase across multiple firms during economic downturns. Defaults tend to cluster in years with tough economic conditions (such as 1990, 2001, and 2009). The course explains how systematic risk drives these correlations and why financial companies are particularly exposed.

Question 6

How is this course structured?

Accepted Answer

The course includes video sections on credit rating agencies and methodology, country risk, credit defaults and expected/unexpected losses, and Basel III. Each section includes quizzes, and additional reading materials are provided. A certificate is issued on completion of all 4 units.

Risk and Loss

About This Course

Course Information

Certificate on Completion

Course Sections

What You Will Learn

Who This Course Is For

Prerequisites

Frequently Asked Questions

Course Details

Need Help?

Pricing

Everything included in your subscription:

Ready to Start Learning?

Ready to get started?