Basel III Credit Rating Systems: An Applied Guide to Quantitative and Qualitative Models

357 Pages·2012·2.083 MB·English

by  Luisa Izzi, Gianluca Oricchio, Laura Vitale (auth.)

BASEL III CREDIT RATING SYSTEMS
PalgraveMacmillanFinanceandCapitalMarketsSeries
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Basel III Credit Rating
Systems
An Applied Guide to Quantitative and
Qualitative Models
Luisa Izzi, Gianluca Oricchio and Laura Vitale
Palgrave
macmillan
©LuisaIzzi,GianlucaOricchioandLauraVitale2012.
Foreword©FabioGallia2012
Softcover reprint of the hardcover 1st edition 2012 978-0-230-29424-0
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Firstpublishedin2012by
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10 9 8 7 6 5 4 3 2 1
21 20 19 18 17 16 15 14 13 12
Contents
ListofFigures viii
ListofTables xii
ListofAbbreviations xv
Acknowledgements xviii
ForewordbyFabioGallia xix
1 Introduction:TheEfficientMarketHypothesisandBaselIII
NewBankingRegulations 1
PARTI THEQUANTITATIVEAPPROACH
TOCREDITRATINGMODELS
2 CorporateSMEandRetailPDmodels 11
2.1 PDcorporateSMEmodeldevelopment 11
2.2 PDcorporateSMEsub-segmentmodels 43
2.3 PDretailmodelsdevelopment 60
3 SovereignandBanks’RatingModels 68
3.1 Countryratingmodel 71
3.2 Bankratingmodel 77
4 ExposureatDefaultValuation 89
4.1 CalculatingEADcomponents 92
4.2 GranularityofCCF 95
4.3 Applicationofaveragevaluestothecurrentportfolio 96
4.4 FromhistoricalmediumvaluetoanexanteEADmodel 97
5 LossGivenDefaultEstimation 102
5.1 StructureoftheLGDworkoutcalculation 102
5.2 DownturnLGD 110
5.3 FromworkouttoanexanteLGDmodel 111
v
vi CONTENTS
6 ValidationofInternalCreditModels 114
6.1 ValidationofthePDmodel 116
6.2 LGDmodelvalidation 121
6.3 EADmodel’svalidation 125
6.4 PDvalidationstatisticaltest 133
PARTII THEQUALITATIVEAPPROACHTO
CREDITRATINGMODELS
7 TheInternalRatingAgency:OrganizationandScope 147
8 ExpertJudgment-basedRatingAssignmentProcess 155
8.1 Introduction 155
8.2 Obligor‘corporate’definition 156
8.3 Ratinghorizon 157
8.4 High-levelstep-by-stepguidetofinalrating 158
8.5 Keydriversofthestand-alonerating 161
8.6 Definitionofsupport 171
8.7 Identificationofthesupportentity 172
8.8 Natureofsupport 173
8.9 Finalrating 177
8.10 Ratingassignmentoninvestmentholdingcompanies 178
8.11 Implicationofconvertibilityrisk 180
9 SlottingCriteriaCreditRatingModels 182
9.1 Fromriskfactorstomaturityprofiles 182
9.2 Maturityprofilesandtheslottingprocess 186
9.3 Puttingitalltogether:theimportanceofslotting 188
10 GlobalRecoveryRate 194
10.1 Introduction 194
10.2 Unsecuredglobalrecoveryrate:definitionanddrivers 196
10.3 Securedglobalrecoveryrate 198
10.4 Particularcasesofglobalrecoveryrate 203
10.5 Exposureatdefaultvaluation 204
PARTIII RATINGASSIGNMENTONSPECIALIZED
LENDING
11 RatingAssignmentonProjectFinance 209
11.1 Projectphaserating 209
11.2 Project’sstand-alonerating 211
11.3 Supportandfinalrating 211
CONTENTS vii
11.4 SeniorunsecuredGRR 211
11.5 GRRsecuredatthefacilitylevel 212
12 RatingAssignmentonObjectFinance 215
12.1 RatingassignmentonLBOs 215
12.2 Ratingassignmentonshippingfinance 220
12.3 Ratingassignmentonairlinesandoperatinglessors 225
13 RatingAssignmentonTelecomOperators 232
13.1 Stand-alonerating 233
PARTIV RISK-ADJUSTEDCREDITPRICINGMODELS
14 PricinginLiquidMarkets 243
14.1 Introduction 243
14.2 TheMertonstructuraldefaultmodel©1 243
14.3 Themathematicalmodel 250
14.4 Nelson–Siegel:aparametricapproach 251
14.5 Thecreditdefaultswap5 251
14.6 Liquidcurves 254
14.7 Non-liquidcurves 255
15 CDS-impliedEDFCreditMeasuresandFair-valueSpreads1 257
15.1 Introduction 257
15.2 Overview 258
15.3 PracticalapplicationsofCDS-impliedEDFmeasures
andfair-valuespreads 260
15.4 CDS-impliedEDFmodelandfair-valuespreadmodel 272
15.5 Applyingtheframeworktosovereigns 284
15.6 Summary 293
15.7 Frequentlyaskedquestions 294
16 PricinginNonliquidMarkets 302
16.1 Introduction 302
16.2 Transitionmatrixstate:dependentpricingmodel 311
16.3 Analyticsofpricingmodels 323
16.4 Pricingofapre-paymentoption 330
Notes 334
References 339
Index 343
Figures
1.1 CreditTreasuryhigh-levelbusinessmodel 3
1.2 Hard-to-valueassets 4
2.1 Mainstepsindevelopingaratingmodel 12
2.2 Information-gatheringrules:anillustrativeexample 19
2.3 Mainstepsinthedevelopmentofstatisticalmodels 20
2.4 Mainstepsinthedevelopmentofstatistical/expert-based
models 21
2.5 Mainstepsinthedevelopmentofpurelyexpert-basedmodels 21
2.6 Schematicviewoftheproposedhierarchy 23
2.7 Exampleofavariablegrowingmonotonicallywiththerisk 26
2.8 Exampleofavariabledecreasingmonotonicallywiththerisk 27
2.9 Exampleofanuncertainrelationwiththerisk 27
2.10 Exampleofa‘U-shaped’factor 29
2.11 Anillustrativemasterscale 41
2.12 Ratingclassdistribution 41
2.13 Poolrepresentation:anillustrativeexample 65
3.1 Mainstepsindevelopingashadowratingmodel 71
3.2 Shadowaccuracyratio 73
3.3 ParentsupportPDadjustment 80
3.4 GovernmentsupportPDadjustment 88
4.1 Classesofcreditproducts 90
4.2 Factork,thegeneralcase 91
4.3 Case1:factork islessthan0 91
4.4 Case2:factork isgreaterthan1 92
4.5 Case3:factork isundefined 93
viii
LISTOFFIGURES ix
4.6 EAD/LasafunctionofU/Lforseveralvaluesofk 94
4.7 Clients’distributionbylimit 97
4.8 Clients’distributionbyutilization 98
4.9 Clients’distributionbyundrawnamount 98
4.10 Datagatheringandassessment 98
4.11 Graphicalrepresentationoftheproposedexantemodel 100
5.1 LGDoverthesecuredandunsecuredpartsofaloan 103
5.2 Finalunsecuredpartoftheloan 107
5.3 ClientdistributionbyrangesofLGDvalues 112
5.4 Clientdistributionbyrangesofcollateralvalues 112
5.5 Clientdistributionbyrangesofloan-to-value 112
6.1 Ratingsystemlife-cycle 115
6.2 Ratingsystemvalidation:areasofanalysis 116
6.3 PDmodelvalidation:areasofassessment 116
6.4 LGDmodelvalidation:areasofassessment 125
6.5 EADmodelvalidation:areasofassessment 130
6.6 Cumulativeaccuracyprofile:anillustrativeexample 135
6.7 Scoredistributionofgoodandbadpositionsofthesample 135
6.8 Thecumulativedistributionofbadsandgoodsperscore
decile:anillustrativeexample 138
6.9 TheKolmogorov–Smirnovstatisticperscoredecile:an
illustrativeexample 138
6.10 Anillustrativeexampleofthepercentagedistributionof
badanddefaultratesperscoredecile:developmentversus
validationsample 140
6.11 Anillustrativeexampleofacomparisonbetweendefault
rateandPDperratingclass 141
6.12 Anillustrativeexampleofthepercentagedistributionof
badsandgoodsperratingclass:validationsample 141
7.1 AssigningPDtoexposure 151
8.1 Stepstoobtainafinalratinginashadowratingapproach 159
8.2 Supportexample 174
14.1 EvolutionofassetvalueandbookliabilitiesforWinstar
communications 244
14.2 EvolutionofassetvaluesanddefaultpointsforCompaq
andAnheuser-Busch 245