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The Building Blocks of Credit Analysis and Credit Risk Rating

In: The Practice of Lending

Author

Listed:
  • Terence M. Yhip

    (University of the West Indies)

  • Bijan M. D. Alagheband

    (McMaster University and Hydro One Networks Inc.)

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.

Suggested Citation

  • Terence M. Yhip & Bijan M. D. Alagheband, 2020. "The Building Blocks of Credit Analysis and Credit Risk Rating," Springer Books, in: The Practice of Lending, chapter 4, pages 125-182, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-32197-0_4
    DOI: 10.1007/978-3-030-32197-0_4
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