Credit Exposure
Are you young? Do you have bad credit? Here's why you'll have a hard time getting a loan.
You go to a bank to borrow $10,000 to start a business. Your credit rating is 550. Not good. You're a serious default risk. Why on earth did you max out your first credit card on auction websites?
The bank doesn't want to give you ten grand. Because that loan is considered the “credit exposure” that the bank faces. This is the total amount of default risk you present to the borrower. They'd much rather have someone who has a 790 credit score with a strong repayment history. They're going to get the $10,000. You're going to get...a pep talk.
Credit exposure fluctuates. As a borrower pays off the loan, the credit exposure will match the remaining balance. Lenders may choose to reduce their credit exposure by hedging on different loans or using financial instruments, like credit swaps.
The general rule of lending is to have high credit exposure to creditworthy individuals with a low default risk. Banks may make attractive lending offers to individuals with high credit scores in order to diversify their credit exposure.
Related or Semi-related Video
Finance: What is the Credit Rating Agenc...4 Views
Finance allah shmoop what is the credit rating agency reform
act of two thousand six otherwise known as crack are
out out something like that All right yeah that's How
the real pros said anyway this act was meant to
improve the quality of company credit ratings like a blindfold
and dartboard should not be involved in making up are
you know coming up with corporate credit ratings Well the
law was ironically enacted in the hope that we would
avoid nightmares like the subprime mortgage crisis that almost brought
down the finances of while the entire country in world
And yes it worked in the same way that a
scale works in an embarrassing episode of the biggest loser
The idea was that the big three agencies moody's s
and p and fitch were colluding with each other and
raiding every security as a okay sort of the same
way wall street cell site analysts were leaned upon in
the nineties by bankers who paid them to rate every
company of strong by so that the companies would favor
the investment banks when doing lucrative secondary offerings and other
personal wealth management services for the founders and senior executives
Newly ridge from you know aipo booty The big three
then produced a product that wasn't reflective of the real
risks inherent in the marketplace Basically they had been labeling
pink slime and hot dog meat as great a sirloin
Yeah well the act made it much easier for smaller
firms to compete for business by doing high quality research
and not being afraid to give bad ratings tow bad
money butchers will The credit rating agency reform act of
o sixth gives both businesses and the government the tools
they need to fight off the shady hucksters of the
world And make sure the pink slime never you know 00:01:55.443 --> [endTime] such a cz your plate financially
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