List of Abbreviations.
Preface.
PART ONE: Bubbles and Crises: The Global Financial Crisis of 2007–2009.
CHAPTER 1: Setting the Stage for Financial Meltdown.
Introduction.
The Changing Nature of Banking.
Reengineering Financial Institutions and Markets.
Summary.
Appendix 1.1: Ratings Comparisons for the Three Major Rating Agencies.
CHAPTER 2: The Three Phases of the Credit Crisis.
Introduction.
Bursting of the Credit Bubble.
Phase 1: Credit Crisis in the Mortgage Market.
Phase 2: The Crisis Spreads—Liquidity Risk.
Phase 3: The Lehman Failure—Underwriting and Political Intervention Risk.
Summary.
CHAPTER 3: The Crisis and Regulatory Failure.
Introduction.
Crisis Intervention.
Looking Forward: Restructuring Plans.
Summary.
PART TWO: Probability of Default Estimation.
CHAPTER 4: Loans as Options: The Moody's KMV Model.
Introduction.
The Link between Loans and Options.
TheMoody’s KMV Model.
Testing the Accuracy of EDFTM Scores.
Critiques of Moody’s KMV EDFTM Scores.
Summary.
Appendix 4.1: Merton’s Valuation Model.
Appendix 4.2: Moody’s KMV RiskCalc.
CHAPTER 5: Reduced Form Models: Kamakura's Risk Manager.
Introduction.
Deriving Risk-Neutral Probabilities of Default.
Generalizing the Discrete Model of Risky Debt Pricing.
The Loss Intensity Process.
Kamakura’s Risk Information Services (KRIS).
Determinants of Bond Spreads.
Summary.
Appendix 5.1: Understanding a Basic Intensity Process.
CHAPTER 6: Other Credit Risk Models.
Introduction.
Credit Scoring Systems.
Mortality Rate Systems.
Artificial Neural Networks.
Comparison of Default Probability Estimation Models.
Summary.
PART THREE: Estimation of Other Model Parameters.
CHAPTER 7: A Critical Parameter: Loss Given Default.
Introduction.
Academic Models of LGD.
Disentangling LGD and PD.
Moody's KMV's Approach to LGD Estimation.
Kamakura's Approach to LGD Estimation.
Summary.
CHAPTER 8: The Credit Risk of Portfolios and Correlations.
Introduction.
Modern Portfolio Theory (MPT): An Overview.
Applying MPT to Nontraded Bonds and Loans.
Estimating Correlations across Nontraded Assets.
Moody’s KMV’s Portfolio Manager.
Kamakura and Other Reduced Form Models.
Summary.
PART FOUR: Putting the Parameters Together.
CHAPTER 9: The VAR Approach: CreditMetrics and Other Models.
Introduction.
The Concept of Value at Risk.
Capital Requirements.
Technical Issues and Problems.
The Portfolio Approach in CreditMetrics.
Summary.
Appendix 9.1: Calculating the Forward Zero Curve for Loan Valuation.
Appendix 9.2: Estimating Unexpected Losses Using Extreme Value Theory.
Appendix 9.3: The Simplified Two-Asset Subportfolio Solution to the N-Asset Portfolio Case.
Appendix 9.4: CreditMetrics and Swap Credit Risk.
CHAPTER 10: Stress Testing Credit Risk Models: Algorithmics Mark-to-Future.
Introduction.
Back-Testing Credit Risk Models.
Using the Algorithmics Mark-to-Future Model.
Stress Testing U.S. Banks in 2009.
Summary.
CHAPTER 11: RAROC Models.
Introduction.
What Is RAROC?
RAROC, ROA, and RORAC.
Alternative Forms of RAROC.
The RAROC Denominator and Correlations.
RAROC and EVA.
Summary.
PART FIVE: Credit Risk Transfer Mechanisms.
CHAPTER 12: Credit Derivatives.
Introduction.
Credit Default Swaps.
Credit Securitizations.
Financial Firms' Use of Credit Derivatives.
CDS Spreads and Rating Agency Rating Systems.
Summary.
Appendix 12.1: Pricing the CDS Spread with Counterparty Credit Risk Exposure.
CHAPTER 13: Capital Regulation.
Introduction.
The 2006 Basel II Plan.
Summary.
Appendix 13.1: Loan Rating Systems.
Notes.
Bibliography.
Index.
