Use to set up loan loss assumptions, which are used in the instrument
calculations.
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Navigate to .
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Select
.
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Enter one of the institution's loan types as the Name for the
risk category that you are creating.
When the risk category is saved, you can select it from the list.
The next part of the setup process involves creating a series of risk
ratings. The program automatically displays a row for the first rating value when you
initially select .
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Enter a risk rating in the Rating
column.
The rating itself is an indicator of the riskiness of a loan, considering
the probability of default and the loss given default. The Rating
can be a number or character, or a combination of both.
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Complete the following fields to define the rating:
- Annual Loss
- The loan loss expense that can be attributed to the loan for a
particular risk rating.
- Max Loss
- The lifetime ceiling for the loan loss expense that can be
attributed to the loan, for a particular risk rating, over the expected life of
the loan.
- ROE Target Change
- This field directly affects the return on equity (ROE) targets that
have been established for the loan products. Typically, a riskier loan has a
higher target compared to a less risky loan, as determined by risk ratings.
- Capital Change
- This field directly affects the capital allocation, and in turn,
calculated loan profitability metrics. Typically, a riskier loan has more
capital allocated to it compared to a less risky loan, as determined by risk
ratings.
- Default
-
The rating marked as Default is used to
prefill the Loan Risk Rating field in the loan form
as a new loan is priced.
Note: The
Loan Loss risk category assigned to the product
type selected for the new loan determines the risk rating items that show up
in the Loan Risk Rating drop-down list in the loan
form.
You can enter a percentage from 0.00 through
100 in any of the four fields. A user-defined value is not
required for every field.
These settings affect profitability metrics, such as Projected Profit and Projected
ROE, calculated for loan instruments.
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Select Add Row to add additional rating thresholds.
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Enter a name for each additional rating in the Rating
column.
Each rating name that you choose must be unique.
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Input the appropriate values in the loss and change fields.
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Select Save.
The rows are automatically sorted in
ascending Rating value order.
On the Products page, you choose one of the user-defined risk categories from the
Loan Loss field when defining each product.
