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The Criteria-Based Approach to Credit Risk Assessment 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 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.

Suggested Citation

  • Terence M. Yhip & Bijan M. D. Alagheband, 2020. "The Criteria-Based Approach to Credit Risk Assessment and Credit Risk Rating," Springer Books, in: The Practice of Lending, chapter 3, pages 95-123, Springer.
    • Handle: RePEc:spr:sprchp:978-3-030-32197-0_3
    DOI: 10.1007/978-3-030-32197-0_3
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