Credit Risk Assessment, Modelling and Management

Course Outlines:

Module One:

Fundamentals of Credit Risk

• The key macro and micro financial concepts behind, and drivers of, credit risk
• Measurement of credit risk and adverse outcomes
• Assessing credit risk and default probability of loan portfolios
• Key determinants for managing credit risk:
  • Probability of default (PD)
  • Exposure at default (EAD)
  • Loss given default (LGD)
• Credit migration and transition matrices
• Fundamental analysis of financial statements, key ratios, qualitative characteristics of the balance sheet
• Off balance sheet and contingent credit risk
• Market-based approaches, bond spreads, swap rates
• Counter party credit risk
• Credit scoring, credit risk modelling, risk profiling and assessing creditworthiness

Module Two:

Credit Ratings Methodologies and Application

• Review of ratings classifications systems of the major Credit Ratings Agencies (CRAs)
• The principal credit ratings agencies – Moody’s, Standard & Poor’s, Fitch
• Overview of the ratings methodologies – issuer analysis, historical data, business cycles
• Commercial paper ratings
• Sovereign ratings – approach to developed markets and emerging markets
• Conflicts of interest – representing credit issuers but designed to protect credit purchasers
• Why did the CRAs perform so poorly in the rating of collateralized debt obligations (CDOs) and other derivatives?
• Ratings migration matrices – use by banks in determining credit risk value at risk (VaR)
• Impact of upgrades/downgrades on market perceptions of creditworthiness
• Dodd-Frank Act de-emphasis on reliance by financial firms on external ratings

Modul Three:

Capital Charges and Accounting Principles

• Review of the distinction between the banking book and the trading book
• Basel III attempts to address regulatory arbitrage
• Treatment of securitizations and off-balance sheet exposures
• Available for Sale issues – impacts on liquidity, high-quality liquid assets (HQLA), rigidity of balance sheets
• Detailed examination of IFRS 9 – implementation timetable, further revisions?
• Recognition of expected losses and early warning of asset impairment
• Amortized cost – held to maturity requirements
• Fair value though other comprehensive income (FVOCI)
• Fair value through profit or loss (FVPL)
  

Module Four:
Counter-Party Credit Risk  

• Examine the various facets of credit risk which hinge on losses sustained from failure of an obligor to honour contractual obligations
• Distinguish the separate components of credit risk:
  • Probability of default by obligor – how reliably can it be estimated?
  • Probability of downgrade or widening credit spreads of counter party
  • Recovery rate – what percentage of obligation can be recovered after default?
  • Credit exposure – estimating loss magnitude in relation to capital buffers
• Determination of a credit default event, ISDA Master Agreement, Credit Support Annex
• Understand the concepts of credit rating and scoring and critical examination of how useful such techniques are for determining actual risk of default?
• New components in the Basel III framework for addressing issues related to default and deterioration of the credit quality of counter parties
• Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)
• Explanation of key concepts of Expected Exposure (EE), Expected Positive Exposure (EPE), Wrong Way Risk (WWR)

Module Five:

Measuring Credit Risk and Techniques for Credit Risk Modelling

• Credit Metrics, credit scoring and credit rating systems
• Quantitative modelling of credit risk using stochastic processes
• Estimating probability of default – KMV Model, distance to default techniques
• Explain how debt and equity can be understood as options on the firm
• Techniques for modelling default risk of CDO’s, CMO’s and other structured vehicles
• Lessons from SIVs and other off-balance sheet financing on credit risk management
• Adapting VaR measures to include a metric for default value at risk
• Credit Migration matrices – scaling over different time frames
• Integrating Credit VaR (CVaR) and Market VaR
• Portfolio CVaR – joint probabilities of default – copula techniques
• Techniques for estimating LGD and recovery rates

Module Six:

Sovereign Credit Risk

• Principal factors used to determine creditworthiness of a sovereign
• Issues relating to sovereign bonds under different jurisdictional frameworks
• Deterioration in public balance sheets –high debt/GDP ratios
• Linkage between sovereign risk and risks to local banking system
• Macro-economic drivers of ratings – global imbalances, surplus/deficit nations
• Role of sovereign Credit Default Swap (CDS) market – is it still vital or declining?
• Sovereign debt re-structuring- bail outs/bail-ins
• Protection to different stakeholders – seniority of claims, preferred status of central banks
• Collective Action Clauses (CACs)
• Sovereign domino thesis and financial contagion