Credit Risk Management In and Out of the Financial Crisis New Approaches to Value at Risk and Other Paradigms
Produktdetaljer
Biografisk notat
ANTHONY SAUNDERS is the John M. Schiff Professor of Finance and former chair of the Department of Finance at the Stern School of Business at New York University. He holds positions on the Board of Academic Consultants of the Federal Reserve Board of Governors as well as the Council of Research Advisors for the Federal National Mortgage Association, and has been a visiting scholar at the Comptroller of the Currency and at the International Monetary Fund.
LINDA ALLEN is the Presidential Professor of Finance at the Zicklin School of Business at Baruch College, City University of New York (CUNY), and Adjunct Professor of Finance at the Stern School of Business, New York University. She has been a member of the Standard & Poor's Academic Council since its formation in 2004. Professor Allen has published extensively in top academic journals in finance and economics.
Credit Risk Management In and Out of the Financial Crisis dissects the 2007-2008 credit crisis and provides solutions for professionals looking to better manage risk through modeling and new technology. This book is a complete update to Credit Risk Measurement: New Approaches to Value at Risk and Other Paradigms, reflecting events stemming from the recent credit crisis.
Authors Anthony Saunders and Linda Allen address everything from the implications of new regulations to how the new rules will change everyday activity in the finance industry. They also provide techniques for modeling-credit scoring, structural, and reduced form models-while offering sound advice for stress testing credit risk models and when to accept or reject loans.
- Breaks down the latest credit risk measurement and modeling techniques and simplifies many of the technical and analytical details surrounding them
- Concentrates on the underlying economics to objectively evaluate new models
- Includes new chapters on how to prevent another crisis from occurring
Understanding credit risk measurement is now more important than ever. Credit Risk Management In and Out of the Financial Crisis will solidify your knowledge of this dynamic discipline.
List of Abbreviations xi
Preface xv
Part One Bubbles and Crises: The Global Financial Crisis of 2007–2009
Chapter 1 Setting the Stage for Financial Meltdown 3
Introduction 3
The Changing Nature of Banking 3
Reengineering Financial Institutions and Markets 17
Summary 21
Appendix 1.1: Ratings Comparisons for the Three Major Rating Agencies 23
Chapter 2 The Three Phases of the Credit Crisis 24
Introduction 24
Bursting of the Credit Bubble 24
Phase 1: Credit Crisis in the Mortgage Market 29
Phase 2: The Crisis Spreads—Liquidity Risk 33
Phase 3: The Lehman Failure—Underwriting and Political Intervention Risk 37
Summary 43
Chapter 3 The Crisis and Regulatory Failure 45
Introduction 45
Crisis Intervention 45
Looking Forward: Restructuring Plans 52
Summary 64
Part Two Probability of Default Estimation
Chapter 4 Loans as Options: The Moody’s KMV Model 67
Introduction 67
The Link between Loans and Options 67
TheMoody’s KMV Model 70
Testing the Accuracy of EDFTM Scores 74
Critiques of Moody’s KMV EDFTM Scores 86
Summary 93
Appendix 4.1: Merton’s Valuation Model 93
Appendix 4.2: Moody’s KMV RiskCalcTM 95
Chapter 5 Reduced Form Models: Kamakura’s Risk Manager 98
Introduction 98
Deriving Risk-Neutral Probabilities of Default 99
Generalizing the Discrete Model of Risky Debt Pricing 102
The Loss Intensity Process 105
Kamakura’s Risk Information Services (KRIS) 108
Determinants of Bond Spreads 110
Summary 114
Appendix 5.1: Understanding a Basic Intensity Process 114
Chapter 6 Other Credit Risk Models 117
Introduction 117
Credit Scoring Systems 117
Mortality Rate Systems 121
Artificial Neural Networks 125
Comparison of Default Probability Estimation Models 127
Summary 131
Part Three Estimation of Other Model Parameters
Chapter 7 A Critical Parameter: Loss Given Default 135
Introduction 135
Academic Models of LGD 135
Disentangling LGD and PD 142
Moody’s KMV’s Approach to LGD Estimation 143
Kamakura’s Approach to LGD Estimation 146
Summary 146
Chapter 8 The Credit Risk of Portfolios and Correlations 148
Introduction 148
Modern Portfolio Theory (MPT): An Overview 149
Applying MPT to Nontraded Bonds and Loans 150
Estimating Correlations across Nontraded Assets 152
Moody’s KMV’s Portfolio Manager 153
Kamakura and Other Reduced Form Models 161
Summary 165
Part Four Putting the Parameters Together
Chapter 9 The VAR Approach: CreditMetrics and Other Models 169
Introduction 169
The Concept of Value at Risk 170
Capital Requirements 177
Technical Issues and Problems 180
The Portfolio Approach in CreditMetrics 184
Summary 195
Appendix 9.1: Calculating the Forward Zero Curve for Loan Valuation 195
Appendix 9.2: Estimating Unexpected Losses Using Extreme Value Theory 200
Appendix 9.3: The Simplified Two-Asset Subportfolio Solution to the N-Asset Portfolio Case 202
Appendix 9.4: CreditMetrics and Swap Credit Risk 202
Chapter 10 Stress Testing Credit Risk Models: Algorithmics Mark-to-Future 208
Introduction 208
Back-Testing Credit Risk Models 209
Using the Algorithmics Mark-to-Future Model 215
Stress Testing U.S. Banks in 2009 220
Summary 227
Chapter 11 RAROC Models 228
Introduction 228
What is RAROC? 228
RAROC, ROA, and RORAC 229
Alternative Forms of RAROC 230
The RAROC Denominator and Correlations 235
RAROC and EVA 238
Summary 238
Part Five Credit Risk Transfer Mechanisms
Chapter 12 Credit Derivatives 243
Introduction 243
Credit Default Swaps 244
Credit Securitizations 259
Financial Firms’ Use of Credit Derivatives 269
CDS Spreads and Rating Agency Rating Systems 269
Summary 271
Appendix 12.1: Pricing the CDS Spread with
Counterparty Credit Risk Exposure 272
Chapter 13 Capital Regulation 274
Introduction 274
The 2006 Basel II Plan 275
Summary 296
Appendix 13.1: Loan Rating Systems 297
Notes 303
Bibliography 341
Index 365
The years preceding the 20072008 financial crisis were characterized by a dramatic increase in systemic risk to the financial system, caused in large part by a shift away from the traditional banking model. Rather than holding loans to maturity, banks moved to an underwriting model in which they originated loans and then quickly sold them, shifting risk to other parties in the financial system. The result was a deterioration in credit quality at the same time as there was a dramatic increase in consumer and corporate leverage, which were not detected by regulators. The combination of the two permitted an undetected build-up of risk in the financial system that created the pre-conditions for the subsequent crisis. But adoption of early warning systems that accurately measure credit risk exposure might have alerted all parties in time for them to take action to manage their risk exposure. That is the role of the credit measurement models surveyed in this book.
In this newly updated Third Edition of Credit Risk Measurement In and Out of the Financial Crisis, Anthony Saunders and Linda Allen discuss all of the latest credit risk measurement and modeling techniques. Professors Saunders and Allen examine how these new models approach the evaluation of individual borrower and portfolio credit risk exposure, as well as the development of derivative contracts to manage credit risk exposure. Some of the alternative models they cover include: loans as options (the KMV and Moody's models), intensity-based models such as Kamakura's Risk Manager, the VaR approach (including CreditMetrics and other models), RAROC models, credit scoring systems, mortality rate systems, and others. In addition, the authors examine the BIS proposals for the New Basel Capital Accord, updated to 2006.
The art and science of credit risk measurement is the single most important topic in finance today. With its comprehensive coverage, summary, and comparison of new approaches, this reliable resource provides you with the best guidance available. Its clear explanations of often complex material will make Credit Risk Measurement In and Out of the Financial Crisis an indispensable resource for bankers, economists, regulators, academics, and students.
The years preceding the 20072008 financial crisis were characterized by a dramatic increase in systemic risk to the financial system, caused in large part by a shift away from the traditional banking model. Rather than holding loans to maturity, banks moved to an underwriting model in which they originated loans and then quickly sold them, shifting risk to other parties in the financial system. The result was a deterioration in credit quality at the same time as there was a dramatic increase in consumer and corporate leverage, which were not detected by regulators. The combination of the two permitted an undetected build-up of risk in the financial system that created the pre-conditions for the subsequent crisis. But adoption of early warning systems that accurately measure credit risk exposure might have alerted all parties in time for them to take action to manage their risk exposure. That is the role of the credit measurement models surveyed in this book.
In this newly updated Third Edition of Credit Risk Measurement In and Out of the Financial Crisis, Anthony Saunders and Linda Allen discuss all of the latest credit risk measurement and modeling techniques. Professors Saunders and Allen examine how these new models approach the evaluation of individual borrower and portfolio credit risk exposure, as well as the development of derivative contracts to manage credit risk exposure. Some of the alternative models they cover include: loans as options (the KMV and Moody's models), intensity-based models such as Kamakura's Risk Manager, the VaR approach (including CreditMetrics and other models), RAROC models, credit scoring systems, mortality rate systems, and others. In addition, the authors examine the BIS proposals for the New Basel Capital Accord, updated to 2006.
The art and science of credit risk measurement is the single most important topic in finance today. With its comprehensive coverage, summary, and comparison of new approaches, this reliable resource provides you with the best guidance available. Its clear explanations of often complex material will make Credit Risk Measurement In and Out of the Financial Crisis an indispensable resource for bankers, economists, regulators, academics, and students.
Produktdetaljer
Biografisk notat
ANTHONY SAUNDERS is the John M. Schiff Professor of Finance and former chair of the Department of Finance at the Stern School of Business at New York University. He holds positions on the Board of Academic Consultants of the Federal Reserve Board of Governors as well as the Council of Research Advisors for the Federal National Mortgage Association, and has been a visiting scholar at the Comptroller of the Currency and at the International Monetary Fund.
LINDA ALLEN is the Presidential Professor of Finance at the Zicklin School of Business at Baruch College, City University of New York (CUNY), and Adjunct Professor of Finance at the Stern School of Business, New York University. She has been a member of the Standard & Poor's Academic Council since its formation in 2004. Professor Allen has published extensively in top academic journals in finance and economics.