Today’s lending decisions for retail clients are often made by technology, such as AI. Despite this, there is a huge demand in the finance industry for people with credit risk expertise.
Credit analysts responsible for making bank lending (or underwriting) decisions often do so for loan requests from larger, commercial, or corporate clients. These decisions are more challenging to automate as they can be more complex and unique than, say, a mortgage request from a retail client.
Counterparty credit risk analysis is also challenging to automate, as assessing the credit risk of a financial market transaction can be very complex. The complexity arises from the unique mix of credit and market risk that counterparty risk encapsulates.
A Typical Day for a Credit Risk Analyst
A credit analyst assessing corporate and commercial loans might spend the morning analyzing a company’s financial statements. They will need to use the company’s financial statements to calculate credit metrics and financial ratios relating to leverage, coverage, and liquidity. This information will support their ultimate lending decision.
After lunch, they might attend meetings with relationship managers to help explain why the bank has decided not to underwrite their client’s lending request so that the relationship managers are better prepared for challenging conversations with clients.
Later in the day, a credit analyst may review the bank’s credit watchlist. These watchlists contain the names of companies with outstanding loans and whose credit quality has deteriorated. Banks must know when to act if the situation deteriorates further. A credit analyst can help advise what action is most appropriate.
For credit analysts working in counterparty credit risk, their day might begin by reviewing reports generated by the bank’s internal models that measure how much the bank’s exposure to counterparties has moved as market conditions have changed. They will work closely with front office trading desks to ensure credit risk exposures do not exceed the bank’s risk appetite for those counterparties and investigate why any breaches of limits may have occurred.
In the afternoon, there may be a meeting where senior credit risk managers outline any pending regulatory changes that may impact how they calculate counterparty risk exposure. Following this, the credit analyst may need to work with model developers to help them integrate changes into the bank’s internal counterparty risk models.
The counterparty credit analyst finishes the day reviewing and assessing the creditworthiness of the bank’s counterparties, including broker-dealers, institutional clients, corporates, and other banks.
Credit Risk Qualifications and Experience
A degree in accounting, economics, or finance is the most common degree held by people working in credit risk. However, mathematics, statistics, computer science, and engineering degrees will also be considered, especially if an applicant is committed to earning a CFA qualification.
Counterparty credit risk analysts should also understand different financial market products, especially derivatives. This knowledge could have been gained in other functions within a bank, such as front office trade support or a transaction processing role.
Strong accounting and financial analysis skills are required for credit risk analysts supporting the lending business within a bank. Counterparty credit analysts also require accounting knowledge but deeper knowledge of appropriate margin and hedging strategies for complex or large derivative transactions.
All credit analysts must be very detail-oriented, have excellent analytical and written/verbal communication skills, be able to work under pressure, and deliver on multiple tight, time-sensitive timelines.
Strong Excel skills are necessary, while programming skills are increasingly desirable across all credit risk roles within a firm’s capital markets function, and are excellent skills to help people stand out from other applicants.
Compensation and Career Development in Credit Risk
Credit risk analysts work in a wide range of industries, which will influence the compensation level. Credit analysts will earn similar salaries to other risk analysts working in the finance industry in a major financial hub. After a couple of years, credit analysts can earn a six-figure USD salary plus bonuses.
The base salary and bonus increase as credit risk professionals move through the ranks to VP, director, and managing director to reflect the added responsibilities of being responsible for a credit risk portfolio.
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