The traditional view of credit risk relates to borrowers, firms, individuals, or financial institutions. Nevertheless, more and more specialized finance transactions deal with structures whose risk assessment is more challenging. The ultimate issue remains identical: what are the chances of losses and the magnitudes of losses? These depend on bundles of contractual covenants ruling the life of the structure.
(i) Clearly describe the following terms used in relation to credit risk analysis:
(a) Credit risk drivers;
(b) Expected Loss
(c) Migration risk
(d) Securitization
(e) Operational risk under Basel II
(ii) Taking an example of a real case, describe how credit risk can migrate into others banking risks and how banks can mitigate credit risk.