Banking
Cost of risk
Loan loss charges as a share of loans, usually quoted in basis points.
Facts checked against sources onWhat does Cost of risk mean?
Cost of risk is the amount a bank sets aside in a year for loans it expects will not be repaid (its loan loss provisions or impairment charges), divided by its average loans. Example: provisions of 12 on average loans of 1,000 give a cost of risk of 1.2 percent, or 120 basis points. It is the main way credit quality reaches the income statement, and it tends to jump in a recession. Under the accounting standards IFRS 9 and, in the United States, CECL, banks provision for losses they expect, not only for losses that have already happened.
Where does it come up in case interview prep?
Related terms
- Non-performing loan (NPL) ratioThe share of a bank's loans that borrowers have stopped paying.
- Basis points (bps)One hundredth of a percent: 100 basis points make 1 percent.
- Net interest margin (NIM)What a bank earns on its loans and investments after paying for its funding, as a share of those assets.
- Return on equity (ROE)Net income as a share of shareholders' equity.
- Cost-to-income ratioOperating costs as a share of operating income. Lower means a more efficient bank.
- CET1 capital ratio (and risk-weighted assets)A bank's highest-quality capital as a share of its risk-weighted assets.
- Liquidity coverage ratio (LCR)Whether a bank holds enough easy-to-sell assets to survive 30 days of stress.
- Loan-to-deposit ratio (LDR)Loans divided by deposits: how much of its deposit base a bank has lent out.
Learn it in context
See Cost of risk at work in a lesson from Retail and commercial banking, with checks as you go.
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