Common Interview Questions for Credit Risk Analysts

One specialized position within the banking industry is that of a credit risk analyst. The job of assessing credit risk is crucial to the profitability of a bank since loans are the primary source of revenue for these institutions.

For those applying for a position to review business loans or business loan portfolios, most of the job-specific questions an interviewee is likely to encounter revolve around these areas of knowledge.

Key Takeaways

• Common interview questions for credit risk analysts include an opinion on a smart debt-to-equity ratio.
• Credit risk analysts need to know how to explain a credit default swap and provide an example of one. 
• General areas of expertise for a credit risk analyst should include being a team player, an understanding of macroeconomic concepts, and the ability to secure and maintain client relationships.

What Does a Credit Risk Analyst Do?

Before we delve into some of the key questions you may come across during a credit risk analyst interview, let’s look at what they do.

A credit risk analyst’s job is to assess the creditworthiness of individuals or companies. This includes reviewing their credit history and determining whether the client is at risk of defaulting if a credit application is approved. If the client qualifies, the analyst calculates how much credit the bank or lender should extend.

Along with credit histories, credit risk analysts also review financial statements and economic conditions to determine a potential borrower’s likely ability to meet interest payment obligations and ultimately pay back a loan.

Credit risk analysts commonly work for credit departments of retail and commercial banks, investment houses, credit card companies, credit rating agencies, alternative lenders, and other financial institutions that extend credit.

How Would You Handle an Important, Long-Time Client Seeking a Loan That Isn’t Safe for the Bank?

This can be a key issue since maintaining good relationships with important corporate clients is essential to a bank’s success. A bank does not want to risk losing a multimillion-dollar client over one loan application. But it also doesn’t want to make loans it does not believe can be paid back.

How you answer this type of question displays your ability to handle customer relations well and offer creative solutions for clients, while not endangering the bank’s position as a lender.

A good answer might be something like, “I would offer a smaller loan amount I believe the bank could safely extend, and then let the client know the exact steps they could take to allow me to extend further credit, and offer to meet with them to review the situation at some appropriate point in the future to consider a larger loan.”

Important

Credit risk analysts must be experts at deciphering financial statements and evaluation metrics such as leverage and profitability ratios.

“What Is a Good Debt-to-Equity Ratio?”

You should have a solid answer ready for this question since the debt-to-equity (D/E) ratio is a critical, if not the primary, financial ratio considered in evaluating a company’s ability to handle its debt financing obligations.

The D/E ratio indicates a company’s total debt relative to its total equity, and it reveals what proportion of a company’s financing is being provided by debt and what proportion by equity:

• A D/E ratio that is too high suggests the company may be borrowing too much to fund its operations. This makes investing in the company riskier as the company is funded by debt that must be repaid.
• A D/E ratio that is too low suggests the company is paying for most of its operations with equity, which is an inefficient and short-term approach to growing a business.

Your answer should show that you understand the ratio and know that ratios lower than 1.0 generally indicate a more financially sound firm, while ratios higher than 1.0 indicate an increasing level of credit risk.

Beyond that, it should be noted that average D/E ratios vary significantly between sectors and industries. A more solid credit risk analysis includes an examination of the current state of the industry and the company’s position within the industry, as well as consideration of other key financial ratios such as the interest coverage ratio or current ratio.

“What Is a Credit Default Swap?”

This question is more likely to be thrown at someone with previous experience in the field who is applying for a senior credit risk analyst position. But, it still might show up in an interview for an entry-level credit risk analyst position with a bank. A good answer demonstrates you understand the concept.

A better answer includes an example. A credit default swap (CDS) is a frequently used method of mitigating risk in fixed-income debt security instruments, such as bonds, and it is one of the most common financial derivatives.

A CDS is essentially investment insurance that allows the buyer to mitigate his investment risk by shifting risk to the seller of a CDS in exchange for a fee. The seller of the CDS stands in the position of guaranteeing the debt security in which the buyer has invested.

Other questions you’ll likely encounter in a credit risk analyst position interview are general questions about your problem-solving abilities, your ability to work as a part of a team, and your understanding of basic macroeconomic concepts such as fiscal policies and the prime rate.

How Much Do Credit Risk Analysts Earn?

As of June 2024, the average annual salary for a credit risk analyst in the United States was $131,000. The highest earners made an average of $177,000 while those at the lower end averaged $99,000 per year.

What Education and Skills Should a Credit Risk Analyst Have?

Most employers require at least an undergraduate degree in accounting, economics, finance, or business for credit risk analyst positions. Additional certifications like the Chartered Financial Analyst (CFA) designation are also very helpful.

Analysts should possess strong analytical, problem-solving, communication, and technical skills. That’s because they must analyze, review, and report complex financial data.

What Are Some of the Key Factors in Credit Risk Analysis?

Credit risk analysts often review several key factors when making their assessments. These are commonly referred to as the Five Cs of credit or character (or credit history), capacity, capital, collateral, and conditions.

The Bottom Line

Credit risk analysts help lenders make important decisions about who is extended credit. So it should come as no surprise that they work under high pressure and tight deadlines. If you’re ready to leap into this field, it’s important to prepare for your interview. Understanding the company that you’re interviewing with and doing a mock interview with the questions we’ve highlighted above can help you get your foot in the door.