Preface
Acknowledgments
Part I: Origination
Chapter 1: Fundamentals of Credit Risk
What is Credit Risk?
Types of Transactions that Create Credit Risk
Who is Exposed to Credit Risk?
Why Manage Credit Risk?
Chapter 2: Governance
Guidelines
Setting Limits
Authorizing Transactions
Staffing
Final Words
Chapter 3: Checklist for Origination
Does the Transaction Fit Into My Strategy?
Does the Risk Fit into My Existing Portfolio?
Do I Understand the Credit Risk?
Does the Seller Keep an Interest in the Deal?
Are the Proper Mitigants in Place?
Is the Legal Documentation Satisfactory?
Is the Deal Priced Adequately?
Do I Have the Skills to Monitor the Exposure?
Is There an Exit Strategy?
Final Words
Part II: Credit Assessment
Chapter 4: Measurement of Credit Risk
Exposure
Default Probability
The Recovery Rate
The Tenor
Direct vs. Contingent Exposure
The Expected Loss
Chapter 5: Dynamic Credit Exposure
Long-Term Supply Agreements
Derivative Products
The Economic Value of a Contract
Mark-to-Market Valuation
Value-at-Risk (VaR)
Chapter 6: Fundamental Credit Analysis
Accounting Basics
A Typical Credit Report
Agency Conflict, Incentives, and Merton’s View of Default Risk
Final Words
Chapter 7: Alternative Estimations of Credit Quality
The Evolution of an Indicator: Moody’s Analytics EDF™
Credit Default Swap Prices
Bond Prices
Final Words
Chapter 8: Securitization
Asset Securitization Overview
The Collateral
The Issuer
The Securities
Main Families of ABS
Securitization for Risk Transfer
Credit Risk Assessment of ABS
Warehousing Risk
Final Words
Part III: Portfolio Management
Chapter 9: Credit Portfolio Management
Level 1
Level 2
Level 3
Organizational Set-Up and Staffing
The IACPM
Final Words
Chapter 10: Economic Capital and Credit Value at Risk (CVaR)
Capital: Economic, Regulatory, Shareholder
Defining Losses: Default vs. Mark-to-Market
Credit Value at Risk or CVaR
Creating the Loss Distribution
Active Portfolio Management and CVaR
Pricing
Final Words
Chapter 11: Regulation
Doing Business with a Regulated Entity
Doing Business as a Regulated Entity
How Regulation Matters: Key Regulation Directives
Final Words
Chapter 12: Accounting Implications of Credit Risk
Loan Impairment
Loan Loss Accounting
Regulatory Requirements for Loan Loss Reserves
Impairment of Debt Securities
Derecognition of Assets
Consolidation of VIEs
Accounting for Netting
Hedge Accounting
Credit Valuation Adjustments, Debit Valuation Adjustments and Own Credit Risk Adjustment
IFRS 7
Final Words
Part IV: Mitigation and Distribution
Chapter 13: Mitigating Derivative Counterparty Credit Risk
Measurement of Counterparty Credit Risk
Mitigation of Counterparty Credit Risk through Collateralization
Legal Documentation
Dealers vs. End-Users
Bilateral Transactions vs. Central Counterparty Clearing
Prime Brokers
Repurchase Agreements
Final Words
Chapter 14: Structural Mitigation
Transactions with Corporates
Transactions with Special Purpose Vehicles
Chapter 15: Credit Insurance, Surety Bonds and Letters of Credit
Credit Insurance
Surety Bonds
Letters of Credit or LoCs
The Providers’ Point of View
Final Words
Chapter 16: Credit Derivatives
The Product
The Settlement Process
Valuation and Accounting Treatment
Uses of CDS
CDS for Credit and Price Discovery
CDS and insurance
LCDS, Indexes, MCDS and ABSCDS
Chapter 17: Collateral Debt Obligations or CDOs
What are CDOs?
Collateralized Loan Obligations or CLOs
Arbitrage CLOs
Balance Sheet CLOs
ABS CDOs
Credit Analysis of CDOs
Final Words
Chapter 18: Bankruptcy
What is Bankruptcy?
Patterns of Bankrupt Companies
Signaling Actions
Examples of Bankruptcies
Final Words
Conclusion
About the Authors
Index
