Credit Risk measurement ppt

[...]... weighted-average cost of capital weighted average life weighted-average risk ratio zero yield curve xiii Credit Risk measurement CHAPTER 1 Why New Approaches to Credit Risk Measurement and Management? n recent years, a revolution has been brewing in risk as it is both measured and managed Contradicting the relatively dull and routine history of credit risk, new technologies and ideas have emerged among a new generation... FI) should hold as part of its capital structure Before we look at some of these new approaches to credit risk measurement, a brief analysis of the more traditional approaches will heighten the contrast between the new and traditional approaches to credit risk measurement Why New Approaches to Credit Risk Measurement and Management? 5 APPENDIX 1.1: A BRIEF OVERVIEW OF KEY VAR CONCEPTS The Role of Capital... Portfolio Theory and Its Application to Loan Portfolios 151 CHAPTER 11 Loan Portfolio Selection and Risk Measurement 157 CHAPTER 12 Stress Testing Credit Risk Models: Algorithmics Mark-to-Future 191 CHAPTER 13 Risk- Adjusted Return on Capital Models 201 CHAPTER 14 Off-Balance-Sheet Credit Risk 213 CHAPTER 15 Credit Derivatives 233 BIBLIOGRAPHY 258 NOTES 276 INDEX 311 list of abbreviations ABS AE AMA ARS... potentially offer better ways to value outstanding loans and credit- risk- exposed instruments such as bonds (corporate and emerging market), as well as better methods for predicting default risk exposures to borrowers and derivative counterparties Moreover, internal models (1) allow (in many cases) the credit risk of portfolios of loans and credit- risk- sensitive instruments to be better evaluated and (2)... frequency Quantitative Impact Study risk- adjusted return on capital risk- based capital repurchase agreement risk- neutral return on assets return on equity return on risk- adjusted capital risk weight List of Abbreviations RWA SBC SM SPV UL VAR WACC WAL WARR ZYC risk weighted assets Swiss Bank Corporation standardized model special-purpose vehicle unexpected losses value at risk weighted-average cost of capital... the loss 8 CREDIT RISK MEASUREMENT distribution of an MTM model, whereas it would not be included for a DM model Moreover, since credit events (particularly default) are somewhat rare events, historical loss rates may not provide accurate estimates of future exposures such as EL and UL Finally, data availability problems plague credit risk measurement models, in contrast to the market risk VAR models... exposure advanced measurement approach adjusted relative spread Bank for International Settlements Broad Index Secured Trust Offering benchmark risk weight Black–Scholes–Merton Model capital asset pricing model collateralized debt obligation credit default swap credit- linked note collateralized lending obligation cumulative mortality rate credit spread Crédit Suisse Financial Products creditworthiness... and to have 1 2 CREDIT RISK MEASUREMENT weaker credit ratings Capital market growth has produced a “winner’s curse” effect on the credit portfolios of traditional FIs 3 MORE COMPETITIVE MARGINS Almost paradoxically, despite the decline in the average quality of loans (described above), interest margins or spreads, especially in wholesale loan markets, have become very thin In short, the risk- return trade-off... of risk is necessary to prevent moral hazard considerations that would encourage banks to take on excessive risk exposures The proposed BIS II Internal Ratings-Based model sets this risk threshold at the 99.9 percentile; that is, the capital charge is sufficient to cover losses in all but the worst 0.1 percent of adverse credit risk events Stated directly: There is a 0.1 percent chance that adverse credit. .. for a summary of basic VAR concepts.) Much of the current interest in fine-tuning credit risk measurement models has been fueled by the proposed BIS New Capital Accord (or socalled BIS II), which would more closely link capital charges to the credit risk exposures for individual retail, commercial, sovereign, and interbank credits Controversy regarding this proposal (discussed at length in Chapter 3) . weighted-average risk ratio ZYC zero yield curve Credit Risk measurement 1 CHAPTER 1 Why New Approaches to Credit Risk Measurement and Management? I n recent years, a revolution has been brewing in risk. and Risk Measurement 157 CHAPTER 12 Stress Testing Credit Risk Models: Algorithmics Mark-to-Future 191 CHAPTER 13 Risk- Adjusted Return on Capital Models 201 CHAPTER 14 Off-Balance-Sheet Credit Risk. the art and science of credit risk measurement and management. Much of the energy in this area has resulted from dissatisfaction with traditional approaches to credit risk measurement and with