Please help with the following problem. Include references in the solution.
According to the Basel II agreement, define credit risk and how you would assess it. Explain why credit scoring helped improve the efficiency of the banking industry?
Credit risk refers to the risk that borrower may default from his obligations and fail to make payments on the debt which he is obligated to do. Basel II emphasizes the use of external ratings which makes use of rating agencies to assess credit risk. Regulatory authorities also requested financial institutions to use new risk management techniques for both domestic and international lending. Basel II ensures that:
-Capital allocation is more sensitive to risk
-There are more disclosure requirements which allows assessment of capital adequacy of financial institutions
The following posting discusses credit risk and explains how one would assess it. It also discusses why credit scoring helped improve the efficiency of the banking industry. References are included along with the solution.