0 Votes +0 Votes -

3 vues68 pagesAbout Credit Risk

Nov 22, 2016

© © All Rights Reserved

PDF, TXT ou lisez en ligne sur Scribd

About Credit Risk

© All Rights Reserved

3 vues

About Credit Risk

© All Rights Reserved

- Times Leader 08-29-2013
- Agencies Involved in the GDR Issue.pptx
- In Course of Banks Lending Involves a Number of Risks
- “A STUDY OF CREDIT ASSESSMENT IN DENA BANK”
- Notes on Risk Classification (Financial Management)
- Montelibano Y Ramos v. La Compania General De Tabacos De Filipinas, 241 U.S. 455 (1916)
- khushboo
- equipment financing application
- Internship on Unilever - Executive Summary
- Export Management
- 9781631576416
- Chpt 2tybcom
- Chapter 11.ppt
- Still Stuck in the Woods
- 14 Reasons Why
- joroel.pptx
- Bank Finance
- FinanceS (2)
- Bond Valuation
- North Carolina Commissioner of Banks Proves Consumer Advocates Wrong

Vous êtes sur la page 1sur 68

Management

Prof. Partha Saha

1.

(Pillar One)

Standardized Approach

(External Ratings)

Foundation Approach

Advanced Approach

(More Sophisticated Approach)

Minimum

Capital

Requirement

Advanced IRB Approach

Foundation IRB Approach

Standardized Approach

Accord

Standardized Approach

Risk Weights based on External Ratings

Five categories [0%, 20%, 50%, 100%, 150%]

Certain Reductions

e.g. Short Term Bank Obligations

Certain Increases

e.g.150% Category for Lowest Rated Obligors

Standardized Approach

Based on Assessment of External Credit

Assessment Institutions

External Credit

Assessments

Sovereigns

Banks/

Securities

Firms

Corporat

es

PublicSector

Entities

(PSEs)

Asset

Securitization

Programs

Standardized Approach:

New Risk Weights (June 1999)

Assessment

Claim

AAA to

A+ to A-

AA-

Sovereigns

1 Risk

0%

BBB+ to

BB+ to

BBB-

B-

Below B-

Unrated

20%

50%

100%

150%

100%

Option 11 20%

Banks

Option 22 20%

50%

3

50%

100%

3

50%

100%

3

100%

150%

150%

100%

3

50%

Corporates

100%

100%

100%

150%

100%

20%

2 Risk weighting based on the assessment of the individual bank.

3 Claims on banks of a short original maturity, for example less than six

.

months, would receive a weighting that is one category more favourable than

the usual risk weight on the banks claims

Standardized Approach:

New Risk Weights (January 2001)

Assessment

Claim

AAA to

A+ to A-

AASovereigns

Banks

BBB-

0%

20%

50%

100%

150%

100%

Option 11

20%

50%

100%

100%

150%

100%

Option 22

20%

50%

50%

100%

100%

100%

Corporates

1

BBB+ to

20%

50%(100%)

150%

150%

50% 3

100%

Risk weighting based on risk weighting of sovereign in which the bank is incorporated.

3 Claims on banks of a short original maturity, for example less than six months, would receive a

.

weighting that is one category more favourable than the usual risk weight on the banks claims

Internal Ratings-Based

Approach

Two-Tier Ratings System:

Obligor Rating

Represents Probability of Default by a Borrower

Facility Rating

Represents Expected Loss of Principal and/or

Interest

Pillar 1

Opportunities for a

Regulatory Capital

Advantage

Example: 30 year Corporate Bond

Standardized

Model

Internal

Model

Capital

Market

Credit

98 Rules

Standardized Approach

16

12

PER CENT

4

RATING

4.5

5.5

CCC

BB-

BB+

BBB

A-

A+

S&P:

AA

1.6

0

AAA

6.5 7

Internal ModelAdvantages

Example: Portfolio

of

100 $1 bonds

diversified across

industries

Internal

model

Standardized

approach

AAA

0.26

1.6

AA

0.77

1.6

1.00

1.6

BBB

2.40

1.6

BB

5.24

8.45

CCC

10.26

Internal Ratings-Based

Approach

Three elements:

Risk Weight Conversion Function

Minimum Requirements for the Management of Policy

and Processes

Emphasis on full Compliance

Definitions;

PD = Probability of default [conservative view of long run average (pooled) for borrowers

assigned to a RR grade.]

LGD = Loss Given Default

EAD = Exposure at Default

Note: BIS is Proposing 75% for Unused Commitments

EL = Expected Loss

Risk Components

Foundation Approach

PD set by Bank

LGD, EAD set by Regulator

50% LGD for Senior Unsecured

Will be reduced by collateral (Financial or Physical)

Advanced Approach

Between 2004 and 2006: floor for Advanced

Approach @ 90% of Foundation Approach

Notes

Consideration is being given to Incorporate Maturity explicitly into the Advanced

Approach

Granularity Adjustment will be made. [not correlation, not models]

Will not recognize Industry, Geography.

Based on Distribution of Exposures by RR.

Adjustment will Increase or Reduce Capital based on Comparison to a Reference Portfolio

[different for Foundation vs. Advanced.]

Components

Borrower

Risk

EXPECTED

LOSS

Rs.

Probability of

Default

Loss Severity

Given Default

Loan Equivalent

Exposure

(PD)

(Severity)

(Exposure)

Rs

What is the

Probability of the

Counterparty

Defaulting?

If Default occurs,

how Much of this

Do we Expect to

Lose?

If Default occurs,

how Much

Exposure do we

expect to have?

Credit Risk arises when the Counter-Party to a

Financial Contract is Unable or Unwilling to

Honour its obligation

It may take following forms

Lending Risk- Borrower fails to Repay Interest/Principal

Credit Quality of a Borrower Deteriorates leading to a

Reduction in the Market Value of the Loan.

Issuer Credit Risk- arises when Issuer of a Debt or

Equity Security Defaults or Become Insolvent

Market value of a Security may decline with Deterioration

of Credit Quality of Issuers

Counter Party Risk- Trading Scenario Fluctuation

Settlement Risk- when there is a One-Sided-Trade

Credit risk is derived from the Probability Distribution of

Economic Loss due to Credit Events

Measured over some Time Horizon, for some Large Set of

Borrowers

Two properties of the probability distribution of economic loss

are important :Expected Credit Loss and Unexpected

Credit Loss

Latter is the Difference between the Potential Loss at

some High Confidence Level and Expected Credit Loss

A firm should earn enough from Customer Spreads to

Cover the Cost of Credit

Cost of Credit =Expected Loss + Cost of Economic

Capital (Unexpected Loss)

Default occurs when the Value of a Companys

Asset falls Below Value of Outstanding Debt

Probability of Default is determined by

Dynamics of Assets

Position of the Shareholders can be described as

having Call Option on the firms asset with a

Strike price equal to Value of Outstanding Debt

Economic value of Default is presented as a Put

Option on the value of the Firms Assets.

Assumptions in Contingent

Claim Approach

The Risk-Free Interest Rate is constant

The firm is in Default if the value of its

Assets falls below the Value of Debt.

Default can occur only at the Maturity Time

of Bond

Payouts in case of Bankruptcy follow

Strict Absolute Priority

Shortcoming of Contingent

claim approach

A Risk-Neutral World is Assumed

Prior default experience suggests that a

firm Defaults long before its assets fall

below the value of Debt

This is one reason why the Analytically

Calculated Credit spreads are Much

Smaller than Actual spreads from

Observed Market Prices.

KMV Approach

KMV derives the actual individual probability of

default for each obligor , which in KMV

terminology is then called Expected Default

Frequency or EDF.

Three steps

Estimation of the Market Value and the

Volatility of Firms Assets

Calculation of the Distance-to-Default (DD)

which is an Index measure of Default Risk

Translation of the DD into Actual Probability of

Default using a default database.

An Actuarial Model:

CreditRisk+

The Derivation of the Default Loss

Distribution in this model comprises the

following steps

Modeling the Frequencies of Default for the

portfolio (Likelihood of Default)

Modeling the Severities in the case of Default

(Risk Impact)

Linking these Distributions together to obtain the

Default Loss Distribution (Risk Distribution)

Step1 Specify the Transition Matrix

Step2-Specify the Credit Risk Horizon

Step3-Specify the Forward Pricing Model

Step4 Derive the Forward Distribution

of the Changes in Portfolio Value

IVaR-incremental vaR -it measures the

incremental impact on the overall VaR of

the portfolio of adding or eliminating an

asset

Positive when the asset is Positively

Correlated with the rest of the Portfolio and

thus add to the Overall Risk

It can be negative if the asset is used as a

hedge against existing risks in the portfolio

risk to its constituent assetss contribution to

overall risk

Prices

Traders regularly Estimate the zero curves for

bonds with different Credit Ratings

This allows them to estimate Probabilities of

Default in a Risk-Neutral World

Yield Curve

A yield curve is a line that plots the Interest rates, at a set

point in Time, of bonds having Equal Credit Quality but

Differing Maturity Dates.

Three-Month, Two-Year, Five-Year and 30-year U.S.

Treasury Debt.

Benchmark for other debt in the market (such as mortgage

rates or bank lending rates)

Typical Pattern

Baa/BBB

Spread

over

Treasuries

A/A

Aa/AA

Aaa/AAA

Maturity

Most analysts use the LIBOR rate as the riskfree rate

London Interbank Offered Rate (LIBOR)

Interest Rate one bank charges another for

a loan

Excess of the Value of a Risk-Free Bond

over a Similar Corporate bond Equals the

Present value of the Cost of Defaults

rates; continuously

compounded)

Maturity

(years)

Risk-free

yield

Corporate

bond yield

5%

5.25%

5%

5.50%

5%

5.70%

5%

5.85%

5%

5.95%

Example

One-year risk-free bond (principal=1) sells for

e

0 .051

0.951229

e 0.05251 0.948854

or at a 0.2497% discount

This indicates that the holder of the

corporate bond expects to lose 0.2497%

from Defaults in the First year

Example continued

Similarly the holder of the corporate bond

expects to lose

e 0.05 2 e 0.0550 2

e

0.05 2

0.009950

Between years one and two the

expected loss is 0.7453%

Example continued

Similarly the bond holder expects to lose

2.0781% in the first three years; 3.3428%

in the first four years; 4.6390% in the first

five years

The expected losses per year in

successive years are 0.2497%,

0.7453%, 1.0831%, 1.2647%, and

1.2962%

Summary of Results

(Table 26.1, page 612)

Maturity

(years)

Cumul. Loss.

%

Loss

During Yr (%)

0.2497

0.2497

0.9950

0.7453

2.0781

1.0831

3.3428

1.2647

4.6390

1.2962

Recovery Rates

Class

Mean(%) SD (%)

Senior Secured

52.31

25.15

Senior Unsecured

48.84

25.01

Senior Subordinated

39.46

24.59

Subordinated

33.71

20.78

Junior Subordinated

19.69

13.85

Probability of Default

Assuming No Recovery

Q(T )

y* ( T )T

or

Q(T ) 1 e [

e y(T )T

y* ( T )T

y( T ) y* ( T )]T

Q(T): Probability that a corporation would default between

time zero and T

Probability of Default

Prob. of Def. (1 - Rec. Rate) Exp. Loss%

Exp. Loss%

Prob of Def

1 - Rec. Rate

If Rec Rate 0.5 in our example, probabilities

of default in years 1, 2, 3 , 4, and 5 are 0.004994,

0.014906, 0.021662, 0.025294, and 0.025924

Characteristics of these Sectors

Relatively Large Exposures to Individual Obligors

Qualitative factors can account for more than 50%

Scarce number of defaulting companies (???)

Limited Historical track record from many banks

in some sectors

these sectors:

Models can severely underestimate the credit risk

profile of obligors given the Low proportion of

Historical defaults in the sectors (???)

Qualitative Factors.

low Predictive Power.

3. Data to calibrate Pd and LGD inputs

4. Logical and Transparent workflow desk-top

application

5. Appropriate Back-Testing and Validation.

Implementing IRB Approach

All credit exposures have to be Rated.

Credit Rating Process needs to be Segregated from the

Loan Approval Process

The Rating of the Customer should be the sole determinant

of all relationship management and administration related

activities.

Rating system must be properly Calibrated and Validated

Allowance for Loan Losses and Capital Adequacy should

be linked with the respective credit rating

Rating should Recognize the Effect of Credit Risk

Mitigation Techniques

The Credit Default Correlation between two

companies is a measure of their tendency to

default at about the same time

Default correlation is important in risk

management when analyzing the benefits of

Credit Risk Diversification

It is also important in the Valuation of some

Credit Derivatives

Measure 1

One commonly used default correlation

measure is the correlation between

1. A variable that equals 1 if company A defaults

between time 0 and time T and zero otherwise

2. A variable that equals 1 if company B defaults

between time 0 and time T and zero otherwise

Usually it increases at T increases.

Measure 1 continued

Denote QA(T) as the probability that company A will

default between time zero and time T, QB(T) as the

probability that company B will default between

time zero and time T, and PAB(T) as the probability

that both A and B will default. The default

correlation measure is

AB (T )

PAB (T ) Q A (T )Q B (T )

[Q A (T ) Q A (T ) 2 ][Q B (T ) Q B (T ) 2 ]

Measure 2

Based on a Gaussian copula model for time to default.

Define tA and tB as the times to default of A and B

The correlation measure, rAB , is the correlation between

uA(tA)=N-1[QA(tA)]

and

uB(tB)=N-1[QB(tB)]

where N is the cumulative normal distribution function

The Gaussian copula measure is often used in

practice because it focuses on the things we

are most interested in (Whether a default

happens and when it happens)

for n companies . For each company the

cumulative probabilities of default during the

next 1, 2, 3, 4, and 5 years are 1%, 3%, 6%,

10%, and 15%, respectively

continued

distribution for each company incorporating

appropriate correlations

N -1(0.01) = -2.33, N -1(0.03) = -1.88,

N -1(0.06) = -1.55, N -1(0.10) = -1.28,

N -1(0.15) = -1.04

continued

-2.33, the company defaults in the first year

When sample is between -2.33 and -1.88, the

company defaults in the second year

When sample is between -1.88 and -1.55, the

company defaults in the third year

When sample is between -1,55 and -1.28, the

company defaults in the fourth year

When sample is between -1.28 and -1.04, the

company defaults during the fifth year

When sample is greater than -1.04, there is no default

during the first five years

Measure 1 vs Measure 2

Measure 1 can be calculated from Measure 2 and vice versa :

PAB (T ) M [u A (T ), u B (T ); r AB ]

and

AB (T )

M [u A (T ), u B (T ); r AB ] QA (T )QB (T )

[QA (T ) QA (T ) 2 ][QB (T ) QB (T ) 2 ]

distributi on function.

Measure 2 is usually significantly higher than Measure 1.

It is much easier to use when many companies are considered because

transforme d survival times can be assumed to be multivaria te normal

Modeling Default

Correlations

Two alternatives models of default

correlation are:

Structural model approach

Reduced form approach

year 1 and 8% in year 2

What is the Cumulative Probability of

default during the two years?

both years

=(.94) (.92) =0.8648

Required probability = 1 .8648

= .1352

=

13.52%

default if the one year T Bill yield is 9%

and a 1 year zero coupon corporate

bond is fetching 15.5%.

Assume no amount can be recovered in

case of default

Returns from corporate bond = 1.155

(1-p) + (0) (p)

Returns from treasury = 1.09.

To prevent Arbitrage,

1.155(1-p) = 1.09

p = 1- 1.09/1.155 = 1- .9437

Probability of default = .0563 = 5.63%

Estimation of PD

RETAIL

SME

CORPORATE

Retail scoring

models

Expert

Judgment

Based Internal

Ratings

Internal Rating

Models

Pooled PD

Mapping to External

Rating Models

samples for

statistical

Data quality

data

Credit Risk

Mitigation

Recognition of Wider Range of Mitigants

Subject to meeting Minimum Requirements

Applies to both Standardized and IRB

Approaches

Collateral

Guarantees

Credit Derivatives

Collateral

Two Approaches

Simple Approach

(Standardized only)

Comprehensive Approach

'Risk-Based Haircut'

A Haircut is the Difference between prices at which

a Market maker can buy and sell a Security.

Market makers can trade at such a thin Spread

'Risk-Based Haircut'

A reduction in the recognized value of an asset in order to

produce an estimate for the level of margin or

financial leverage that is acceptable to use when

purchasing or continuing to own the asset.

An analyst undertaking a Risk-based Haircut of an asset

attempts to determine the chances of the asset's value

falling below its current level, so that a sufficient

buffer can be established to protect against a margin

call

Collateral

Comprehensive Approach

Coverage of residual risks through

Haircuts

(H)

Weights

(W)

Collateral

Comprehensive Approach

H (Haircut)- should reflect the Volatility of

the Collateral

W (Weight)- should reflect Legal

Uncertainty and Other Residual Risks.

A floor is the Lowest Acceptable Limit as restricted by

Controlling Parties.

Floors can be established for a number of factors (prices,

wages, interest rates, underwriting standards and

bonds)

Collateral Example

Rs1,000 loan to BBB Rated Corporate

Rs. 800 Collateralized by Bond

issued by AAA rated bank

Residual Maturity of Both: 2 years

Collateral Example

Simple Approach

Collateralized claims receive the risk weight

applicable to the collateral instrument,

subject to a floor of 20%

Example: Rs1,000 Rs.800 = Rs.200

Rs.200 x 100% = Rs.200

Rs.800 x 20% = Rs.160

Risk Weighted Assets: Rs.200+Rs.160 =

Rs.360

Collateral Example

Comprehensive Approach

C

Rs800

CA

Rs.770

1 H E H C 1 .04 .06

Rs.800)

6%)

HC = Haircut appropriate for the Collateral

Received

(e.g.= 4%)

CA = Adjusted value of the collateral (e.g. Rs.770)

Collateral Example

Comprehensive Approach

Calculation of risk weighted assets based

on following formula:

r* x E = r x [E-(1-w) x CA]

Collateral Example

Comprehensive Approach

r* = Risk weight of the position taking into

w1 = 0.15

r = Risk weight of uncollateralized exposure

(e.g. 100%)

E = Value of the uncollateralized exposure

(e.g. Rs1000)

Risk Weighted Assets

34.5% x Rs.1,000 = 100% x [Rs1,000 - (1-0.15) x

Rs.770] = Rs.345

Note: 1 Discussions ongoing with BIS re double counting of

w factor with Operational Risk

Collateral Example

Comprehensive Approach

Rs.800

C A Rs.770

1 0.04 0.06

Risk Weighted Assets

34.5% x Rs.1,000 = 100% x [Rs.1,000 - (1-0.15) x Rs.770]

= Rs.345

Collateral Example

Approach

No Collateral

Simple

Comprehensive

Risk Weighted

Assets

1000

360

345

Capital

Charge

80.0

28.8

27.6

- Times Leader 08-29-2013Transféré parThe Times Leader
- Agencies Involved in the GDR Issue.pptxTransféré parAnand Kumar Suman
- In Course of Banks Lending Involves a Number of RisksTransféré parRakesh Shah
- “A STUDY OF CREDIT ASSESSMENT IN DENA BANK”Transféré parDeepali Mahilagiri
- Notes on Risk Classification (Financial Management)Transféré parZahedul Ahasan
- Montelibano Y Ramos v. La Compania General De Tabacos De Filipinas, 241 U.S. 455 (1916)Transféré parScribd Government Docs
- khushbooTransféré parprince
- equipment financing applicationTransféré parapi-273429599
- Internship on Unilever - Executive SummaryTransféré parMuntasir
- Export ManagementTransféré parTanmoy Chakraborty
- 9781631576416Transféré parBusiness Expert Press
- Chpt 2tybcomTransféré parAnamika Sonawane
- Chapter 11.pptTransféré parMahmood Khan
- Still Stuck in the WoodsTransféré parTim Price
- 14 Reasons WhyTransféré parbluechatvn
- joroel.pptxTransféré parVanessa Libres Adajar
- Bank FinanceTransféré parsushil1308
- FinanceS (2)Transféré parIvani Katal
- Bond ValuationTransféré parfloccinaucinihilipilification
- North Carolina Commissioner of Banks Proves Consumer Advocates WrongTransféré parSmall Dollar Loans
- 08 Social Science Class xTransféré parMisbah Patel
- BW4thQtrBR022817Transféré parFaye Reyes
- unit_iv_economics_x-_2.pdfTransféré parAlok Kumar Jha
- YourShare Spring 2012Transféré parOklahoma Employees Credit Union
- addicted to shopping paperTransféré parapi-356962807
- Credeit Policy.al AminTransféré partjummon
- NpaTransféré parJoshua Stalin Selvaraj
- GQ Ball Pen Ind Rating Report 2012Transféré parKhaled Hasan Khan
- UntitledTransféré parsharonbhodge1882
- Estores vs Spouses SupanganTransféré parAnne Miguel

- Presentation on Harshad MehtaTransféré parAnshika Srivastava
- New List of MBA BBA ProjectsTransféré parchauhanbrothers3423
- A Comparative Study of Online P2P Lending in the USA and ChinaTransféré parpinki22
- HPH Catalogue.xlsxTransféré parRajesh Naidu
- Diagnosis of Global Company. Economic–Financial Analysis Tool, Basic of Elaborating the Budget of Income and CostsTransféré parRaluca Datcu
- Internship ReportTransféré parNguyễn Khánh Diệp
- Investor ProtectionTransféré parManisha Vats
- Banking Laws and Jurisprudence 2009 Party Duh NotesTransféré parPhilipBrentMorales-MartirezCariaga
- arthakrantiTransféré parakhil_kodali
- Micro Finance PresentationTransféré parAsif Iqbal
- Import Export DocumentationTransféré parWarisJamal
- b.j. Thomas - Intermediate VocabularyTransféré parguanna
- HSBC 20100115Transféré parZerohedge
- Introduction to Branch Lecture Notes[1]Transféré parpladop
- Bank Asia HRM360 ReportTransféré parProbortok Somaj
- [Political Analysis] Vivien Lowndes, Mark Roberts - Why Institutions Matter_ the New Institutionalism in Political Science (2013, Palgrave)Transféré parJorge Salcedo
- Private EquityTransféré parapi-76793459
- Anatomia de Un Plan de Negocio - Linda PinsonTransféré parlalavedra
- Import Trade ProcedureTransféré parArun Sharma
- Challenges of Financing Small Scale Business Enterprises in NigeriaTransféré parShaguolo O. Joseph
- BCom model question papersTransféré parmsriramca
- ABL Annual Report 2015 UpdatedTransféré parali.khan10
- Bank Clients Perception of Information Technology Usage, Service Delivery and Customer Satisfaction Reflections on Uganda's Banking Sector - FaythTransféré parShafiqud Doulah
- Memorandum of AssociationTransféré parShahid Mashhood
- Deepak Singh Negi -SynopsisTransféré parDeepak Singh Negi
- Bankers’ Books Evidence Act 1879Transféré parJo Jo
- Finthech EvolutionTransféré parThéo Roig
- WebServices_API_1.0Transféré parggirish67
- Soal Bahasa Inggris 75Transféré parWillyAna
- History of Banking IndustryTransféré parKimberly Pasalo

## Bien plus que des documents.

Découvrez tout ce que Scribd a à offrir, dont les livres et les livres audio des principaux éditeurs.

Annulez à tout moment.