Description
Book SynopsisTable of ContentsPreface xiii
Acknowledgments xxi
About the Companion Website xxiii
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? 19
Chapter 2 Governance 21
Guidelines 22
Skills 25
Setting Limits 30
Oversight 30
Final Words 33
Chapter 3 Checklist for Origination 35
Does the Transaction Fit into My Strategy? 36
Does the Risk Fit into My Existing Portfolio? 37
Do I Understand the Credit Risk? 38
Does the Seller Keep an Interest in the Deal? 39
Are the Proper Mitigants in Place? 40
Is the Legal Documentation Satisfactory? 41
Is the Deal Priced Adequately? 41
Do I Have the Skills to Monitor the Exposure? 42
Is There an Exit Strategy? 43
Final Words 44
Part Two Credit Assessment
Chapter 4 Measurement of Credit Risk 47
Exposure 47
Probability of Default 52
The Recovery Rate 62
The Tenor 63
Direct versus Contingent Exposure 64
The Expected Loss 65
Chapter 5 Dynamic Credit Exposure 67
Long-Term Supply Agreements 68
Derivative Products 70
The Economic Value of a Contract 73
Mark-to-Market Valuation 75
Value at Risk (VaR) 78
Chapter 6 Fundamental Credit Analysis 81
Accounting Basics 83
A Typical Credit Report 91
Agency Conflict, Incentives, and Merton’s View of Default Risk 100
Final Words 105
Chapter 7 Alternative Estimations of Credit Quality 107
The Evolution of an Indicator: Moody’s Analytics EDF™ 108
Credit Default Swap Prices 114
Bond Prices 120
Final Words 121
Chapter 8 Consumer Finance 123
What Is Consumer Finance? 126
Segmentation of Consumer Finance Products 127
Major Families of Consumer Finance Products 129
Assessment of Credit Quality 136
Decisions by Lenders 139
Regulatory Environment 143
Chapter 9 State and Local Government Credit 145
State and Local Governments 145
Exposure Types 146
Assessing Credit Risk 152
Managing Credit Risk 156
Final Words 160
Chapter 10 Sovereign Credit Risk 161
Sovereign Borrowers 161
Types of Sovereign Bonds 162
Sovereign Debt Market 163
Credit Analysis 163
Mitigation 166
Default and Recovery 167
Final Words 168
Chapter 11 Securitization 169
Asset Securitization Overview 171
The Collateral 174
The Issuer 178
The Securities 179
Main Families of ABSs 182
Securitization for Risk Transfer 186
Credit Risk Assessment of ABS 189
Warehousing Risk 191
Final Words 192
Chapter 12 Collateral Loan Obligations (CLOs) 193
Overview of the Corporate Loan Market 194
What Are CLOs? 194
Arbitrage CLOs 196
Balance Sheet CLOs 200
ABS CDOs 205
Credit Analysis of CLOs 207
Part Three Portfolio Management
Chapter 13 Credit Portfolio Management 213
Level 1 215
Level 2 219
Level 3 224
Organizational Setup and Staffing 226
The IACPM 227
Final Words 227
Chapter 14 Economic Capital and Credit Value at Risk (CVaR) 229
Capital: Economic, Regulatory, Shareholder 230
Defining Losses: Default versus Mark-to-Market (MTM) 232
Credit Value at Risk or CVaR 235
Creating the Loss Distribution 242
Active Portfolio Management and CVaR 249
Pricing 251
Final Words 252
Chapter 15 Regulation 255
Doing Business with a Regulated Entity 256
Doing Business as a Regulated Entity 262
How Regulation Matters: Key Regulation Directives 263
Final Words 271
Chapter 16 Accounting Implications of Credit Risk 273
Loan Impairment 274
Loan-Loss Accounting 275
Regulatory Requirements for Loan-Loss Reserves 277
Impairment of Debt Securities 278
Derecognition of Assets 279
Consolidation of Variable Interest Entities (VIEs) 280
Accounting for Netting 281
Hedge Accounting 282
Credit Valuation Adjustments, Debit Valuation Adjustments, and Own Credit Risk Adjustment 284
IFRS 7 285
Final Words 285
Part Four Mitigation and Transfer
Chapter 17 Mitigating Derivative Counterparty Credit Risk 289
Measurement of Counterparty Credit Risk 289
Mitigation of Counterparty Credit Risk through Collateralization 290
Legal Documentation 298
Dealers versus End Users 299
Bilateral Transactions versus Central Counterparty Clearing 299
Prime Brokers 303
Repurchase Agreements 304
Final Words 306
Chapter 18 Structural Mitigation 307
Transactions with Corporates 308
Transactions with Special Purpose Vehicles 317
Chapter 19 Credit Insurance, Surety Bonds, and Letters of Credit 325
Credit Insurance 326
Surety Bonds 332
Letters of Credit or LoCs 335
The Providers’ Point of View 339
Final Words 342
Chapter 20 Credit Derivatives 345
The Product 345
The Settlement Process 349
Valuation and Accounting Treatment 354
Uses of CDSs 356
Credit Default Swaps for Credit and Price Discovery 360
Credit Default Swaps and Insurance 360
Indexes, Loan CDSs, MCDSs, and ABS CDSs 361
Chapter 21 Bankruptcy 363
What Is Bankruptcy? 364
Patterns of Bankrupt Companies 365
Signaling Actions 368
Examples of Bankruptcies 369
Final Words 372
About the Authors 373
Index 375
