Global Credit Certificate Level 2 Self-study

Chapter 14: Qualitative Risk Factors

This chapter delves into behavioral finance, exploring cognitive and emotional biases that may impact the credit decision-making process. It also emphasizes the importance of critical thinking techniques and processes.

By the end of this chapter you should be able to describe, explain and evaluate the:

• 4-step model for assessing credit risk
  Operating environment using the PESTEL (political, economic, sociocultural, technological, environmental, legal) framework
• Sector performance, trends, competitive intensity and specific critical success factors
• Business profile, diversification and competitive position
• Ownership structure and required investment returns
• Management and corporate governance
• Financial control and reporting transparency
• Bank regulation

Chapter 15: Business Profile Analysis

This chapter focuses on corporate trading performance, analyzing revenue growth, profitability, cash generation, and trading efficiency. It also examines corporate and bank business risks, including capital investment, asset quality, market risk, and operational risk, as well as sources of revenue and operating expenses.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Corporate trading performance: revenue growth and risks; profitability; cash generation; trading efficiency
• Corporate trading risks: capital investment; cash conversion cycle; working capital and net trading assets; business risk and liquidity
• Bank business risk: asset quality and credit risk, market risk and operational risk
• Bank profitability: revenue sources, operating expenses and credit costs

Chapter 16: Funding and Capital Analysis

This chapter evaluates the risks inherent in corporate funding sources and structures, assessing leverage levels and the ability to service
debt. It also explores bank funding and liquidity risks, along with regulatory capital, stress testing, and hybrid capital.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Corporate financial risks: risks inherent in corporate funding sources and funding structure; assessing leverage levels; servicing debt; controlling financial risk
• Corporate debt serviceability: under a range of scenarios
• Bank funding and liquidity risks: risks in deposits and market funding sources and bank funding structures
• Bank capital: regulatory, capital, stress testing and hybrid capital
• Financial profile: of a company or bank in the context of location, sector and company specific factors

Chapter 17: Comprehensive Financial Analysis: Corporates and Banks

This chapter provides a comprehensive analysis of corporate trading profiles, including performance and risks. It also investigates corporate funding and liquidity as well as bank business risks, profitability, funding, and capital.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Corporate trading profile:
  - Trading performance: revenue growth and risks,
  profitability; cash generation; trading efficiency
  - Trading risks: capital investment; cash conversion cycle; working capital and net trading assets; business risk and liquidity
• Corporate funding and liquidity profile:
  - Corporate financial risks: risks inherent in the funding sources and funding structure; assessing leverage levels; servicing debt; controlling financial risk
  - Corporate debt serviceability: under a range of scenarios
• Bank business risks and profitability
  - Risks: asset quality and credit risk, market risk and operational risk
  - Profitability: revenue sources, operating expenses and credit costs
• Bank funding and capital
  - Bank funding and liquidity risks: risks in deposits and market funding sources and bank funding structures
  - Bank capital: regulatory capital stress testing and hybrid capital
• Financial profile: of a company or bank in the context of location, sector and company specific factors

Chapter 18: Cash Flow Forecasting

This chapter discusses the importance and limitations of cash flow forecasting models. It describes the key elements of model design, construction of a company’s revenues, costs, and funding forecasts, and sensitivity of the forecast
model under different scenarios.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Importance and limitations of cash flow forecasting models
• Key elements of cash flow forecasting model design
• Construction of a forecast of a company’s revenues, costs and funding based on appropriate inputs
• Sensitivity of the forecast model to a range of potential scenarios
• Serviceability of a company’s debt under a range of potential scenarios

Chapter 19: Critical Thinking and Behavioral Biases

This chapter revisits the concept of behavioral finance, particularly cognitive and emotional biases that may affect the credit decision-making process. It again underscores the importance of critical thinking techniques and processes.

By the end of this chapter, you should be able to describe, explain and evaluate:

• Critical thinking: the importance of critical thinking and the
  techniques and processes used
• Behavioral finance: the cognitive and emotional biases that
  may impact on the credit decision-making process, and how
  we may recognize their effects

Chapter 20: Decision-Making Principles

introduces the principles of decision-making,
considering risk culture and governance, credit approval cycle, accounting
considerations, and additional factors influencing credit decisions.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Risk culture and governance
• Credit approval cycle
• Accounting considerations that impact the decision-making process
• Additional credit decision considerations
• Purpose of the transaction
• Proposed transaction payback alternatives
• Credit pricing and portfolio modeling

Chapter 21: Effective Decision-Making Framework

This chapter presents a framework for effective decision-making, discussing relative choices related to the depth of the analytic process, approaches to analyzing separately sourced standardized financial data, tools for monitoring credit performance, and constraining risk scenarios and risk appetite.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Relative choices related to depth of the analytic process
• Analysis approach to separately sourced standardized financial data
• Tools for monitoring credit performance
• Constraining risk scenarios and risk appetite
• Decision ownership and the need for transparency
• Importance of communications in making recommendations, taking credit decisions and conducting reviews

Chapter 22: Trends in New Technologies and their Impact on Credit

This chapter explores the influence of technology on the financial industry, including the emergence of cybersecurity risks, the development of data sources to support credit analysis, and the impact of technological developments on risk management within credit institutions.

By the end of this chapter you should be able to describe, explain and evaluate the:

• Nature of the data utilized by financial institutions, how this may affect an institution’s credit risk
• Emergence of technology as both a driver and a facilitator of
  change in the financial services sector
• Benefits of technology in general and the nature and
  benefits offered by recent technological developments
• Nature and management of cybersecurity risks in light of
  developing laws and regulations
• Effect of technology on the credit assessment process