Question :
Banks find it more profitable to lend money as the margin on lending is much higher than any other banking activity. However, banks have to assess credit risks and take necessary measures to reduce and mitigate their risks. Banks usually take collaterals such as floating charges, fixed charges and personal guarantees to secure their exposures.
(i) Clearly explain the following terms used in relation to credit risk analysis:
(a) Expected Loss
(b) Credit risk drivers;
(c) Credit scoring and artificial intelligence models
(ii) Identify the three main pillars of Basel II and discuss how Basel II is expected to ameliorate bank risks management.