A global investment bank expands its risk department to include climate risk assessment. Senior management directs the department to implement approaches for evaluating how climate change affects traditional risk types. A risk manager recommends risk metrics for key risk types that measure physical and transition risk impacts.
To measure credit risk, which metric should the analyst recommend?
To measure credit risk, the appropriate metric is Loss Given Default (LGD). This metric estimates the potential losses a lender might incur if a borrower defaults on a loan. It is critical for evaluating the financial impact of credit risk, which fits the context of assessing how climate change could affect the creditworthiness of companies.
Operational risk -> level of company preparedness Credit risk -> Loss given default (LGD)
Credit Risk Metrics —>LGD
Level of preparedness is for operational risk. LGD is for credit risk
LGD is correct for sure
LGD 100%
LGD for credit risk