Bank Lending: Credit Risk Analysis and Loan Contracts

This lecture covers the fundamentals of bank lending and credit risk analysis, focusing on the structure and importance of loans in financial intermediation. It begins with an overview of the asset structure of Swiss banks, highlighting the significance of customer loans, particularly mortgages. The instructor defines loans as purchases of illiquid financial assets and categorizes them into business and consumer loans. Key elements of loan contracts, including financial and non-financial obligations, are discussed, emphasizing the role of collateral and covenants in mitigating risks. The lecture also delves into credit analysis, introducing the five C's: capacity, character, capital, collateral, and conditions, which help assess a borrower's creditworthiness. The impact of economic conditions on lending practices is examined, alongside a case study on the effects of the COVID-19 pandemic on credit analysis. The session concludes with a discussion on government loan guarantees and their implications for credit risk and borrower incentives, providing a comprehensive understanding of the lending process.