Managing Credit Risk by John B. Caouette -- Read -- Imperial Library of Trantor

Index

Cover Contents Title Copyright Dedication About the Authors Introduction Chapter 1: Credit Risk

Changing Attitudes Toward Credit More Nations Borrow More Leverage, More Opportunity, and More Risk The Golden Age of Banking Credit Risk Pricing is Now Market-Driven Credit Management is Important to the Global Economy New Transactions, New Risks New Lenders New Approaches to Credit Risk Technology to the Rescue

Chapter 2: Credit Culture

A Modern Risk Management Framework Credit Culture at Work Goldman Sachs: Managing Through Credit Culture Jpmorgan: Molding a New Culture from a Grand and Varied Tradition What Makes Credit Culture Work?

Chapter 3: Classic Industry Players

Banks and Savings Institutions Competition, Concentration, and Change Some Lessons were Learned Liquidity: A Resource Unique to Banks Insurance Companies Finance Companies Special Purpose Entities

Chapter 4: The Portfolio Managers

Fixed Income Portfolio Strategy Hedge Funds

Chapter 5: Structural Hubs

Exchanges Clearinghouses Netting, Collateral, and Downgrade Triggers Credit Derivative Product Companies Limitations of Structural Hubs

Chapter 6: The Rating Agencies

Agencies Around the World Growth in Issues Rated The Rating Process Ratings Performance Ratings and Regulators Emerging Trends

Chapter 7: Classic Credit Analysis

Credit Analysis as an Expert System Shifting Emphasis from the Balance Sheet to Cash Flow Credit Analysis: God is in the Details Financial Ratios: Footprints in the Sand Industry Analysis for Term Lending Classic Credit Foundations Remain But Banking Practices Have Moved Ahead You Can Have Your Cake But Only a Slice of It

Chapter 8: Asset-Based Lending and Lease Finance

Managing the Risks Growing Respectability Alternatives to Asset-Based Lending Lease Finance The Roots of Securitization and Lbos Favorable Results

Chapter 9: Introduction to Credit Risk Models

Models—Who Needs Them? Variety in Models Relevance of Credit Models to the Decision Maker Portfolio Management Models Coming Attractions

Chapter 10: Credit Risk Models Based upon Accounting Data and Market Values

Human Expert Systems and Subjective Analysis Accounting-Based Credit Scoring Systems From Univariate to Multivariate Methods Altman’s Z-Score Model (1968) Z-Scores and Bond Ratings Private Firm Z′-Score Model Nonmanufacturers Z′-Score Model Emerging Market Scoring Model and Process Zeta® Credit Risk Model Classification Accuracy Group Prior Probabilities, Error Costs, and Model Efficiency Reestimation of Coefficients Altman and Sabato Sme Model Riskcalc® Model By Moody’s KMV Standard & Poor’s Creditmodel® (2003) Bondscore® Model Deployment of Z-Score, Zeta®, Risccalc®, Creditmodel®, Credit Risk Tracker® and Bondscore® Models Limitations of Multivariate Models Neural Networks Expert Systems Models Based on Market Risk Premiums Mortality Models

Chapter 11: Corporate Credit Risk Models Based on Stock Price

Predecessors of Options Theory Option Pricing Equity is a Call Option Debt is Like Selling a Put Option The Edf Model Private Company Kmv Model Kmv and Other Approaches Predictive Ability of Default Models Default Prediction Results for the Kmv Model Applications Use of Edf in Asset Valuation: Structural Models and Reduced Form Models Refinements to the Kmv Edf Model (1995–2006) Concluding Remarks

Chapter 12: Consumer Finance Models

Credit Screening Models Design of Credit Scoring Models Tests for Model Adequacy Out-Of-Sample Testing Advantages and Disadvantages Dynamic Credit Risk Management Systems Decision Tree Models Neural Network Models Credit Scoring Models for Building Market Share The Next Steps

Chapter 13: Credit Models for Small Business, Real Estate, and Financial Institutions

Small Business Models Residential Real Estate Models Commercial Real Estate Models Bank Models Exception Via Critical Ratios: Outlier/Peer Group Multivariate or Composite Measurements Market Value-Based Measurements

Chapter 14: Testing and Implementation of Credit Risk Models

An Intrinsic Value Approach Ingredients of an Effective System Work-In-Progress Issues in Credit Risk Modeling

Chapter 15: About Corporate Default Rates

High-Yield Bond Default Rates Mortality and Cumulative Default Rates Comparing Cumulative Default Rates Age of Defaults Fallen Angel Defaults Industry Defaults Forecasting Default Rates Issuer-Based Default Rate Forecasts The Mortality Dollar-Based Rate Approach A Final Note on Forecasted Default Rates Leverage Loan Default Rates Structured Finance Default Rates

Chapter 16: Default Recovery Rates and LGD in Credit Risk Modeling and Practice

Introduction First Generation Structural-Form Models: The Merton Approach Second Generation Structural-Form Models Reduced-Form Models Credit Value-At-Risk Models Recent Contributions on the Pd-Rr Relationship and Their Impact Correlation Results’ Impact and Downturn Lgd Some Final References Recovery Ratings Recovery Rates and Procyclicality Further Empirical Evidence Concluding Remarks

Chapter 17: Credit Risk Migration

Methods for Tracking Rating Migration The Timeliness and Accuracy of Rating Changes Rating Migration Results Compared Impact on Results Credit Risk Migration and Loan Losses Future Directions

Chapter 18: Introduction to Portfolio Approaches

Diversification is Good, Other Things Being Equal A Number of Small Bets Versus a Single Large Bet Issues in Implementing the Standard Portfolio Approach to Credit Portfolios Distribution of Returns Holding Period Absence of Price Discovery Lack of Good Data Solution for the Correlation Matrix Current Portfolio Approaches Expected Versus Unexpected Losses Optimization of Capital Usage Varying Objectives

Chapter 19: Economic Capital and Capital Allocation

Use of the Pricing Mechanism Innovations By Bankers Trust in Capital Allocation Value at Risk Economic Capital and Regulatory Capital Estimation and Optimization of Economic Capital

Chapter 20: Application of Portfolio Approaches

Mkmv’s Portfolio Manager Optimal Portfolio and the Efficient Frontier Risk-Neutral Pricing for Credit Valuation Factors Driving Asset Value Creditmetrics (1997) Treatment of Default Correlation Creditmetrics Implementation—Creditmanager Comments on Creditmetrics Mckinsey & Co./Wilson Model (1997) Kamakura Corporation’s Default and Probability Models Altman’s (1997) Optimization Approach Portfolio Risk and Efficient Frontiers Using Unexpected Loss Portfolio Risk Using Unexpected Losses Empirical Results of Altman’s Alternative Approach Bank Regulations (BIS II) and Portfolio Modeling The Future of Credit Portfolio Techniques

Chapter 21: Credit Derivatives

Credit Derivatives: An Example Structural Forms of Credit Derivatives Features of Credit Derivatives Useful to a Risk Seller Features of Credit Derivatives Useful to a Risk Buyer Possible Applications of Credit Derivatives Not Everything is Good About Credit Derivatives The Regulatory View of Credit Derivatives Credit Risk of Credit Derivatives Valuation of Credit Derivatives Current Pricing Practice

Chapter 22: Counter Party Risk

Derivative Losses The Role of Counterparty Credit Risk Derivative Exposure Interest Rate Swaps Calculation of Exposure and Expected Loss Currency Swaps Management of Derivative Credit Risk Master Netting Agreements Structured Finance Solutions to Derivative Credit Risk Evaluating the Current Methods for Assessing Derivative Credit Risk Combining Credit and Market Risk

Chapter 23: Country Risk Models

Historical Context Fundamental Analysis: Key Ratios Country Rating Systems Challenges in Assessing Country Risk In Every Cloud a Silver Lining Country Risk Management

Chapter 24: Structured Finance

Uses of Securitization Benefits for Issuers Securitizing Mortgages Securitizing Other Assets Segmentation of Risk Financing Risky Credits The Anatomy of an Asset-Backed Security Evaluating Asset-Backed Securities Impact on the Banking Industry Other Applications of Structured Finance Perils of Securitization Structured Finance Techniques and Investment Management Future of Securitization

Chapter 25: New Markets, New Players, New Ways to Play

CDOs: CLOs and CBOs A Shifting Mix of Collateral Distressed Debt Markets Who’s Buying? Four Major Players That Have Made a Difference to the Way the Game is Played

Chapter 26: Market Chaos and a Reversion to the Mean

Liquidity Risk is the Next Big Challenge The Importance of a Strong Credit Culture

Appendix Index

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