Answer the following question:

1. Select the statement that is true, regarding credit scoring models:

A. Using historical information of past loans, we estimate a credit scoring model and obtain estimates of the probability of default (z-score). Next, we estimate the model to predict the expected loss of new loan applications (stress test)

B. We estimate a credit scoring model for new loan applications and another model for past loans. We compare the scores obtained from the two models. If they are similar, then we can use these models to compute the expected loss.

C. Using data of loans granted in the past, we estimate a credit scoring model. This model is applied to assess new loan applications, estimating scores for each loan application and accepting applications whose score is below a threshold.

D. Using information of new loan applications, we estimate a credit scoring model and obtain scores that are used to assess whether or not the loan should have been granted.

2. The lending function can be decomposed into:

A) Origination, Funding, Transformation, Brokerage and Credit Culture

B) Origination, Funding, Servicing, Risk Processing and Credit Culture

C) Origination, Funding, Transformation, Brokerage, Risk Processing and Credit Culture

D) Origination, Funding, Servicing, Brokerage and Credit Culture

3. A bank is using a credit scoring model to assess new loan applications of firms. The model is a linear regression that relates the status of the loan (Y=1 if loan is defaulted; Y=0 if loan is non-defaulted) with financial characteristics of the firm. The bank is using a threshold C that implies a Type I Error (Good clients are classified as bad) equal to 20% and a Type II Error (Bad clients are classified as good) equal to 15%. The bank is considering the possibility to increase the threshold from C to C, being C>C. What could the bank expect with the proportions of Type I and Type II Errors?

A. Type I Error decreases and Type II Error increases

B. Type I Error increases and Type II Error decreases

C. Both Type I and Type II Errors increase

D. Both Type I and Type II Errors decrease Bank IBM is updating its levels of loan provisions for 2021 to withstand the negative impact of the coronavirus crisis.

4. Using credit scoring models, the bank estimates an increase in the expected loss of the loan portfolio. The reason is that the new scenario of lower GDP growth has the following impact on the loan portfolio:

A. Increase in the threshold that separates good from bad borrowers

B. Loans migrate to internal rating groups with higher probability of default

C. Increase in the Z-Score of the loans

D. Increase in both Type I and Type II errors E. Both A and B

5. Choose the CORRECT answer:

A. Equity, Collateral and long term relationships reduce asymmetric information problems in the bank and borrower relationship.

B. Borrowers reputation built on past performance could signal his future behavior.

C. Credit risk depends among other factors on economic conditions (market conditions, sector conditions, corporate conditions and firms management quality).

D. All the previous answers are correct