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More About This Title The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures
English
A comprehensive guide to credit risk management
The Handbook of Credit Risk Management presents a comprehensive overview of the practice of credit risk management for a large institution. It is a guide for professionals and students wanting a deeper understanding of how to manage credit exposures. The Handbook provides a detailed roadmap for managing beyond the financial analysis of individual transactions and counterparties. Written in a straightforward and accessible style, the authors outline how to manage a portfolio of credit exposures--from origination and assessment of credit fundamentals to hedging and pricing. The Handbook is relevant for corporations, pension funds, endowments, asset managers, banks and insurance companies alike.
- Covers the four essential aspects of credit risk management: Origination, Credit Risk Assessment, Portfolio Management and Risk Transfer.
- Provides ample references to and examples of credit market services as a resource for those readers having credit risk responsibilities.
- Designed for busy professionals as well as finance, risk management and MBA students.
As financial transactions grow more complex, proactive management of credit portfolios is no longer optional for an institution, but a matter of survival.
English
Sylvain Bouteillé is Head Key Account Management and a member of the management team of the North American division of Swiss Re Corporate Solutions. In 1996, he joined Swiss Re in Zurich, Switzerland, in the newly created credit risk management division. In 1998, Bouteillé moved to New York where, as U.S. Head of Credit Risk Management, he was responsible for credit risk aspects of all insurance and capital markets transactions. In 2003, he became U.S. Head of Structured Credit Underwriting, where he originated and structured credit derivatives and financial guaranty reinsurance transactions. Since 2008, Bouteillé has been working with risk managers of Fortune 500 companies to develop traditional and non-standard insurance solutions. Bouteillé holds an MS in civil engineering from ENTPE (France) and an MBA from INSEAD (France).
Diane Coogan-Pushner is Distinguished Lecturer and Director of the Graduate Program in Risk Management at Queens College, City University of New York. She began her career in financial services at the World Bank and held increasingly senior positions in finance and strategy at AT&T and PricewaterhouseCoopers. Coogan-Pushner moved to Swiss Re, and as Managing Director, originated and structured reinsurance transactions and other risk transfer solutions for insurance clients. Other credits include roles as a portfolio manager for a hedge fund and for a private equity fund both dedicated to financial services. She has served as a director for an insurer and as a member of S&P's Insurance Ratings Advisory Council, and consults to financial institutions in their asset management strategy. She received her PhD in economics from Boston University in 1992 and is a CFA charterholder.
English
Preface xiii
Acknowledgments xxi
Part One Origination
Chapter 1 Fundamentals of Credit Risk 3
What Is Credit Risk? 3
Types of Transactions That Create Credit Risk 5
Who Is Exposed to Credit Risk? 9
Why Manage Credit Risk? 18
Chapter 2 Governance 21
Guidelines 22
Setting Limits 25
Skills 26
Oversight 29
Chapter 3 Checklist for Origination 33
Does the Transaction Fit into My Strategy? 34
Does the Risk Fit into My Existing Portfolio? 35
Do I Understand the Credit Risk? 36
Does the Seller Keep an Interest in the Deal? 37
Are the Proper Mitigants in Place? 38
Is the Legal Documentation Satisfactory? 38
Is the Deal Priced Adequately? 39
Do I Have the Skills to Monitor the Exposure? 40
Is There an Exit Strategy? 40
Part Two Credit Assessment
Chapter 4 Measurement of Credit Risk 45
Exposure 45
Default Probability 50
The Recovery Rate 60
The Tenor 62
Direct versus Contingent Exposure 63
The Expected Loss 63
Chapter 5 Dynamic Credit Exposure 65
Long-Term Supply Agreements 66
Derivative Products 68
The Economic Value of a Contract 71
Mark-to-Market Valuation 73
Value at Risk (VaR) 76
Chapter 6 Fundamental Credit Analysis 79
Accounting Basics 80
A Typical Credit Report 88
Agency Conflict, Incentives, and Merton’s
View of Default Risk 97
Chapter 7 Alternative Estimations of Credit Quality 103
The Evolution of an Indicator: Moody’s Analytics EDF™ 104
Credit Default Swap Prices 110
Bond Prices 116
Chapter 8 Securitization 119
Asset Securitization Overview 120
The Collateral 123
The Issuer 127
The Securities 128
Main Families of ABS 131
Securitization for Risk Transfer 135
Credit Risk Assessment of ABS 137
Warehousing Risk 138
Part Three Portfolio Management
Chapter 9 Credit Portfolio Management 143
Level 1 145
Level 2 149
Level 3 153
Organizational Set-Up and Staffing 155
The IACPM 156
Chapter 10 Economic Capital and Credit Value at Risk (CVaR) 159
Capital: Economic, Regulatory, Shareholder 160
Defining Losses: Default versus Mark-to-Market 163
Credit Value at Risk or CVaR 165
Creating the Loss Distribution 171
Active Portfolio Management and CVaR 179
Pricing 181
Chapter 11 Regulation 183
Doing Business with a Regulated Entity 184
Doing Business as a Regulated Entity 189
How Regulation Matters: Key Regulation Directives 190
Chapter 12 Accounting Implications of Credit Risk 201
Loan Impairment 202
Loan-Loss Accounting 203
Regulatory Requirements for Loan-Loss Reserves 205
Impairment of Debt Securities 206
Derecognition of Assets 207
Consolidation of Variable Interest Entities (VIEs) 208
Accounting for Netting 209
Hedge Accounting 211
Credit Valuation Adjustments, Debit Valuation
Adjustments and Own Credit Risk Adjustment 212
IFRS 7 213
Part Four Mitigation and Transfer
Chapter 13 Mitigating Derivative Counterparty Credit Risk 217
Measurement of Counterparty Credit Risk 217
Mitigation of Counterparty Credit Risk through Collateralization 218
Legal Documentation 225
Dealers versus End-Users 226
Bilateral Transactions versus Central Counterparty Clearing 227
Prime Brokers 229
Repurchase Agreements 230
Final Words 232
Chapter 14 Structural Mitigation 233
Transactions with Corporates 234
Segmentation of the Commercial Loan Market
Senior versus Junior Debt
Secured versus Unsecured Loans
Covenants
Events of Default
Transactions with Special Purpose Vehicles 240
Impact of Structural Mitigants on Default Probability
Impact of Structural Mitigants on Recovery Rates
Senior/Subordinated Structures
Credit Enhancement
Chapter 15 Credit Insurance, Surety Bonds, and Letters of Credit 249
Credit Insurance 250
Surety Bonds 255
Letters of Credit or LoCs 258
The Providers’ Point of View 263
Chapter 16 Credit Derivatives 267
The Product 267
The Settlement Process 270
Valuation and Accounting Treatment 274
Uses of CDS 276
Credit Default Swaps for Credit and Price Discovery 280
Credit Default Swaps and Insurance 280
Indexes, Loan CDSs, MCDSs, and ABS CDSs 280
Chapter 17 Collateral Debt Obligations (CDOs) 283
What Are CDOs? 283
Collateralized Loan Obligations or CLOs 286
Arbitrage CLOs 287
Balance Sheet CLOs 290
ABS CDOs 292
Credit Analysis of CDOs 296
Chapter 18 Bankruptcy 301
What Is Bankruptcy? 301
Patterns of Bankrupt Companies 303
Signaling Actions 306
Examples of Bankruptcies 307
About the Authors 311
Index 313
