Leveraged Lending

Risk Identification System

Banks need thoroughly articulated policies that specify requirements and criteria for risk rating transactions, identifying loan impairment, and recognizing losses. Such specificity is critical for maintaining the integrity of an institution’s risk management system. The internal rating systems of banks materially involved in leveraged lending should integrate both the probability of default and loss given default in their ratings to ensure that the risk of the borrower and the risk of the transaction structure itself are clearly evaluated. This is particularly important for leveraged finance transaction structures, which can result in large losses upon default.

Previous: Credit Analysis Next: Problem Loan Management