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More About This Title Credit Risk Management
English
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
English
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.
English
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
