Risk grade

BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED 2026-11-01

// THE SHORT ANSWER

A risk grade is the bank's rating of how likely a borrower is to default, set from its financial position, its industry, its management and its conduct, and reset at every annual review or whenever something important changes. The grade drives the capital the bank must hold, the margin it charges, the authority needed to approve the facility, and how often the file is reviewed. A downgrade can move all four — the margin when the facility next allows it to be reset — which makes the grade the most consequential line in a review, and one the borrower rarely sees.

BASIS  Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.