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Credit Risk Management

Credit Risk Management

  • Author:
  • Publisher: John Wiley & Sons
  • ISBN: 9780470827499
  • Published In: May 2012
  • Format: Paperback , 528 pages
  • Jurisdiction: Hong Kong, International ? Disclaimer:
    Countri(es) stated herein are used as reference only
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    The importance of managing credit and credit risks carefully and appropriately cannot be overestimated. The very success or failure of a bank and the banking industry in general may well depend on how credit risk is handled.

    Banking professionals must be fully versed in the risks associated with credit operations and how to manage those risks. This up-to-date volume is an invaluable reference and study tool that delves deep into issues associated with credit risk management.

    Credit Risk Management from the Hong Kong Institute of Bankers (HKIB) discusses the various ways through which banks manage risks. Essential for candidates studying for the HKIB Associateship Examination, it can also help those who want to acquire a deeper understanding of how and why banks make decisions and set up processes that lower their risk.

    Topics covered in this book include:

    • Active credit portfolio management
    • Risk management, pricing, and capital adequacy
    • Capital requirements for banks
    • Approaches to credit risk management
    • Structural models and probability of default
    • Techniques to determine loss given default
    • Derivatives and structured products
  • Preface xi

    PART 1 THE CREDIT RISK FRAMEWORK 1

    1 Definitions and Concepts 3

    Learning Objectives 3

    Introduction 4

    What is Credit? 4

    Evolution of Credit Markets 7

    What is Credit Risk? 10

    Building Blocks of Portfolio Risk 14

    Default 18

    Portfolio Performance Metrics 19

    Data and Data Systems 21

    Risk Control Framework and Governance 22

    2 Active Credit Portfolio Management 27

    Learning Objectives 27

    Introduction 28

    What is ACPM? 28

    Mark-to-market Approach 30

    Metrics for ACPM 35

    Data and Models 37

    3 Capital Adequacy Framework 43

    Learning Objectives 43

    Introduction 44

    Capital Adequacy Under Basel I 44

    Basel II's Three Pillar Approach 49

    Basel III (2010) 53

    Capital Adequacy in Hong Kong 54

    Implementation Issues 55

    PART 2 CAPITAL REQUIREMENTS ON CREDIT RISK UNDER BASEL 59

    4 Standardised Approach to Credit Risk 61

    Learning Objectives 61

    Introduction 62

    Standardised Approach to Credit Risk 62

    Individual Claims 63

    Credit Risk Mitigation 74

    Securitization Exposures 84

    5 Internal Ratings-Based Approach 89

    Learning Objectives 89

    Introduction 90

    What is the IRB Approach? 90

    Building Blocks of the IRB Approaches 92

    IRB and Selected Exposures 93

    Internal Rating System 106

    Validation of IRB Models 114

    PART 3 CREDIT RISK AND PORTFOLIO MODELS 123

    6 Structural Models 125

    Learning Objectives 125

    Introduction 126

    Basic Structural Model 126

    Black-Scholes-Merton 129

    Valuation 133

    Black-Cox 135

    Vasicek-Kealhofer 140

    Stochastic Interest Rates 144

    Endogenous Default Barrier 145

    Corporate Transaction Analysis 146

    Liquidity 147

    Other Structural Approaches 148

    7 Econometric Models 159

    Learning Objectives 159

    Introduction 160

    Discrete-choice Models 160

    Hazard Rate (Duration) Models 168

    Practical Applications 172

    Calibrating Econometric Models 177

    Calibrating to Ratings 187

    Interpreting the Relative Infl uence of Factors in Econometric Models 192

    Data Issues 194

    8 Loss Given Default 203

    Learning Objectives 203

    Introduction 204

    Timeline of Default Resolution 204

    Measures of LGD 206

    Multifactor Approach to LGD 212

    Regression Framework 217

    9 Reduced-form Models 223

    Learning Objectives 223

    Introduction 224

    Reduced-form Models in Context 225

    Basic Intensity Models 228

    DSL Framework 237

    Credit Rating Transition Models 241

    Default Probability Density Version of Intensity Models 247

    Generic Credit Curves 253

    10 PD Model Validation 259

    Learning Objectives 259

    Introduction 260

    Parameter Robustness 260

    Measures of Model Power 263

    Measures of PD Levels and Calibration 267

    Sample Size and Confi dence Bounds 280

    Assessing the Economic Value of More Powerful PD Models 296

    Designing Validation Tests 305

    11 Portfolio Models 315

    Learning Objectives 315

    Introduction 316

    Measuring Portfolio Diversifi cation 316

    Portfolio Risk Assuming No Credit Migration 317

    Structural Models of Default Correlation 319

    Credit Migration 323

    Model of Value Correlation 325

    Probability of Large Losses 329

    Valuation 332

    Return Calculations 334

    Risk Calculations 337

    Portfolio Loss Distribution 343

    Capital 355

    Economic Capital and Portfolio Management 358

    Improving Portfolio Performance 361

    Performance Metrics 364

    Reduced-form Models and Portfolio Modelling 368

    Correlation in Intensity Models 369

    Copulas 371

    Integrating Market and Credit Risk 373

    Counterparty Risk in CDS and Credit Portfolios 374

    Stress-testing 376

    PART 4 CREDIT DERIVATIVES AND STRUCTURED CREDIT PRODUCTS 383

    12 Credit Derivatives 385

    Learning Objectives 385

    Introduction 386

    What are Credit Derivatives? 386

    Credit Default Swap 389

    Total Return Swaps 393

    Credit-linked Notes 398

    Credit Spread Derivatives 399

    Pricing Credit Derivatives 401

    13 Structured Credit Products 415

    Learning Objectives 415

    Introduction 416

    Securitisation 416

    Asset Backed Security 423

    Collateralised Debt Obligation 424

    Capital Charge Requirements 427

    Derivatives and Structured Credit as Risk Management Tools 428

    Summary 430

    Key Terms 431

    Study Guide 431

    Further Reading 431

    Index 433

  • Industrial and Commercial Bank of China (Asia) Limited (ICBC (Asia)) is delighted to sponsor this resource book. ICBC (Asia), the flagship of the Hong Kong banking business of Industrial and Commercial Bank of China Limited (ICBC), currently the world's largest commercial bank by market capitalization, offers a wide range of financial services to corporate and individual customers. The Bank is renowned for its provision of cross-border financial services and RMB-related services.

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