Financial Fridays with Julie Pratten – Creditworthiness

Friday 13 February 2015

by Julie Pratten

Welcome to Financial Fridays, your bi-weekly helping of buzz words and hot topics from the world of banking and finance, plus some ideas for activities that can be used as warmers or fillers or full-blown lessons. This week’s feature is creditworthiness and we will be taking a look at what makes banks and clients creditworthy.

If you have any requests or questions about any particular aspect of banking and finance, we would love to hear from you, so please feel free to post them.

This Financial Friday features:

• BANKING BUZZ – a handful of banking buzzwords. Why not send us your favourites­?

• FINANCIAL FOCUS – Credit risk

• BLUE CHIP LINKS – suggestions for listening material and activities on the HSBC scandal.


Banking Buzz

Select the correct answer, A or B?

1 Love money

A a zero rated loan given by a development bank

B seed money or capital given to an entrepreneur by family or friends to start a business.

2 Killer bees

A companies or individuals who help a company fight a hostile takeover

B a group of companies who buy shares at the same time to try to take over another company

3 Risk weighted assets

a a measure of the amount of a banks assets, adjusted for risk

b assets which carry a very high level of risk

4 Aspirin count theory

A a string of losses in a bank which cause the shareholders to take pain killers.

B  The more stock prices fall, more and more people need pain relievers to survive the day.

5 Diworsification

A diversifying in too many directions which may have a negative effect on a company.

B when changes in interest rates damages bank business,


Financial Friday Focus: Credit Risk

In banking, credit risk is the risk of loss that stems from a borrower’s failure to repay a loan. The higher level of credit risk, the higher the rate of interest investors will demand for lending their capital.

1 Complete the definition of credit risk by matching the two halves of sentences 1-5 and A-E.                                                                                                

  • 1. Credit risks are calculated based …
  • 2. Credit risk arises whenever a borrower…
  • 3. Credit rating agencies such as Moody’s, S&P and Fitch ….
  • 4. This calculation includes …
  • 5. Investors receive compensation for…
  • A … expects to use future cash flows to pay current debts.
  • B …  taking on credit risk via interest payments from the borrower.
  • C … evaluate the credit risks of thousands of corporations every day
  • D … on the borrowers’ overall ability to repay.
  • E … the borrowers’ assets and its ability to generate income


2 Synonyms

In the short text ‘Banks Seek to Minimize Risks’ substitute the words in bold for the words in the box.

Default cautious provide charge
Fees component revenue spread
Loans shareholders safety paramount
threat goal mistakes monitoring


Banks seek to minimize risks

As we all know banks are in business to earn a profit.  Although in recent years charges (1)  have become a growing part (2) of banks’ income (3) , the largest segment of a bank’s profit is still earned through the markup of prices intended to cover the bank’s selling expenses and provide profit on a transaction (4) -the difference between the interest charged on loans and the interest paid to depositors.  The money used to make advances (5) comes from depositors and stockholders (6), and banks consider the protection (7) of their deposits of the utmost importance (8).  The greatest danger (9) to this safety arises when borrowers can’t repay (10).  As a result, bankers worldwide have traditionally been low-risk lenders.  Banks’ target/ (11) for loan losses is just 0.5 per cent.  In other words, they must judge correctly in 99.5 per cent of all loans they make (12).  This very small margin for error (13) means that banks must be extremely prudential (14) when evaluating loan proposals.  Why, then, shouldn’t banks accept loans of higher risk and simply impose (15) a higher rate of interest?  Because supervising (16) them would be difficult, time-consuming and costly.  In addition, tough competition among financial institutions means no one institution can charge significantly more than its competitors for services.

Answers: Banking Buzzwords: 1 b ,2 a ,3 a, 4 b ,5 a; Ex 1:1 d, 2 a, 3 c , 4 e , 5 b. Ex 2: 1 fees, 2 component, 3 revenue, 4 spread, 5 loans, 6 shareholders, 7 safety , 8 paramount,9 threat. 10 default, 11 goal, 12 provide, 13 mistakes, 14 cautious, 15 charge, 16 monitoring,


Blue Chip Links

With news of the HBSC scandal dominating the headlines this week, we just couldn’t leave it out of this week’s Financial Friday. Here’s a nice video clip from the Irish Times.

1 Pre Listening Vocabulary

Before listening, find words with similar meanings in the two columns.

1 tax evasion A bona fide
2 abett B sue
3 offence C tax avoidance
4 legitimate D connected to
5 pending E assist
6 prosecute F  illegal trading
7 trafficking G crime
8 associated with H in progress


2 After listening, complete this summary of the video.

The Irish Times and (1) ………………/………………………in 44 other countries is publishing several articles regarding (2 ) …………….………/………………………about HSBC Bank in Geneva in Switzerland. This information was taken from the bank and shared with the (3)  ………………/………………………by a former employee who then informed the (4 ) …………/……………………… So far hundreds of millions of Euros of tax have been collected and the authorities in (5) …………………..(6) ……………… and (7) ………………..are prosecuting HSBC in Geneva with charges of evading and abetting (8)…………./………………


3 Compare your text with a partner and decide which items in bold are correct.


Three Irish people have been prosecuted for tax offences because of the data and a fourth case is pending. Although many account holders had their accounts there for illegal reasons, many had their money in the bank to hide it from the Revenue, and some bank officials knew this. Many clients with large sums of money in the bank were associated with drug trafficking, the blood diamonds trade and some were politicians.


Thirteen Irish people have been prosecuted for tax offences because of the data and a fourteenth case is pending. Although a few account holders had their accounts there for legitimate reasons, many had their money in the bank to hide it from the Revenue, and some bank employees knew this. Many clients with large sums of money in the bank were associated with arms trafficking, the stolen diamonds trade and some were bank officials.

Answers Irish Times Video Ex 1: 1 c, 2 e, 3 g, 4 a, 5 h, 6 b, 7 f, 8 d; Ex 2:  1 media organizations, 2 confidential information, 3 French authorities, 4 tax authorities, 5 Argentina, 6 Belgium, 7 France, 8 tax evasion; Ex 3: Three, Irish, fourth, many, legitimate, bank officials, arms trafficking, blood diamonds trade, politicians;

(If you need the video script, drop me a line.)


More Video Clips

How Do Credit Ratings Work?

What is counterparty risk?                                       


Copyright Julie Pratten 2015
Copyright this edition Delta Publishing 2015

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