The Building Blocks of Credit Analysis and Credit Risk Rating

  • Terence M. Yhip
  • Bijan M. D. Alagheband


This chapter fleshes out the borrower risk rating (BRR) components, and demonstrates the calculation of component and composite BRRs. A BRR scorecard would usually have four main building blocks: Industry Risk, Business Risk, Management Risk, and Financial Risk. Each block is usually defined by a set of Risk Factors and a set of Risk Elements, all weighted. The chapter discusses methods to dampen point-in-cycle effects on the BRR and the conditions that require the use of projected financial statements instead of current for more accurate BRR determination. The chapter provides a framework for creating descriptors/characteristics (for a given risk factor/risk element) to differentiate between risk ratings effectively and consistently. The monotonicity between descriptor and BRR is a necessary condition of a predictive risk-rating system.


Building block Industry/Business/Management/Financial risk Point-in-cycle Through-the-cycle Monotonicity 

Supplementary material

485627_1_En_4_MOESM1_ESM.pptx (940 kb)
The building blocks of credit analysis and credit risk rating(... (PPTX 941 kb)
485627_1_En_4_MOESM2_ESM.xlsx (56 kb)
Brr scorecard template (PPTX 56 kb)

Copyright information

© The Author(s) 2020

Authors and Affiliations

  • Terence M. Yhip
    • 1
  • Bijan M. D. Alagheband
    • 2
  1. 1.University of the West IndiesMississaugaCanada
  2. 2.McMaster University and Hydro One Networks Inc.TorontoCanada

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