Credit Risk Management In and Out of the Financial Crisis: New Approaches to Value at Risk and Other Paradigms (Wiley Finance)

398 Pages·2010·3.25 MB·English

by  Anthony Saunders

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Credit Risk
Measurement In
and Out of the
Financial Crisis
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E1FFIRS 02/27/2010 1:15:59 Page3
Credit Risk
Measurement In
and Out of the
Financial Crisis
New Approaches to Value at
Risk and Other Paradigms
Third Edition
ANTHONY SAUNDERS
LINDA ALLEN
John Wiley & Sons, Inc.
E1FFIRS 02/27/2010 1:15:59 Page4
Copyright#2010byAnthonySaundersandLindaAllen.Allrightsreserved.
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LibraryofCongressCataloging-in-PublicationData:
Saunders,Anthony,1949-
Creditriskmanagementinandoutofthefinancialcrisis:newapproachestovalueatrisk
andotherparadigms/AnthonySaunders,LindaAllen.—3rded.
p.cm.—(Wileyfinanceseries)
Rev.ed.of:Creditriskmeasurement.2nded.c2002.
Includesbibliographicalreferencesandindex.
ISBN978-0-470-47834-9(cloth)
1. Bankloans. 2. Bankmanagement. 3. Credit—Management. 4. Riskmanagement.
I. Allen,Linda,1954- II. Saunders,Anthony,1949-Creditriskmeasurement. III. Title.
HG1641.S332010
0
332.120684—dc22
2009044765
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
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Contents
ListofAbbreviations xi
Preface xv
PARTONE
BubblesandCrises:TheGlobalFinancialCrisisof2007–2009
CHAPTER1
SettingtheStageforFinancialMeltdown 3
Introduction 3
TheChangingNatureofBanking 3
ReengineeringFinancialInstitutionsandMarkets 17
Summary 21
Appendix1.1:RatingsComparisonsfortheThreeMajor
RatingAgencies 23
CHAPTER2
TheThreePhasesoftheCreditCrisis 24
Introduction 24
BurstingoftheCreditBubble 24
Phase1:CreditCrisisintheMortgageMarket 29
Phase2:TheCrisisSpreads—LiquidityRisk 33
Phase3:TheLehmanFailure—Underwritingand
PoliticalInterventionRisk 37
Summary 43
CHAPTER3
TheCrisisandRegulatoryFailure 45
Introduction 45
CrisisIntervention 45
v
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vi CONTENTS
LookingForward:RestructuringPlans 52
Summary 64
PARTTWO
ProbabilityofDefaultEstimation
CHAPTER4
LoansasOptions:TheMoody’sKMVModel 67
Introduction 67
TheLinkbetweenLoansandOptions 67
TheMoody’sKMVModel 70
TestingtheAccuracyofEDFTMScores 74
CritiquesofMoody’sKMVEDFTMScores 86
Summary 93
Appendix4.1:Merton’sValuationModel 93
Appendix4.2:Moody’sKMVRiskCalcTM 95
CHAPTER5
ReducedFormModels:Kamakura’sRiskManager 98
Introduction 98
DerivingRisk-NeutralProbabilitiesofDefault 99
GeneralizingtheDiscreteModelofRiskyDebtPricing 102
TheLossIntensityProcess 105
Kamakura’sRiskInformationServices(KRIS) 108
DeterminantsofBondSpreads 110
Summary 114
Appendix5.1:UnderstandingaBasic
IntensityProcess 114
CHAPTER6
OtherCreditRiskModels 117
Introduction 117
CreditScoringSystems 117
MortalityRateSystems 121
ArtificialNeuralNetworks 125
ComparisonofDefaultProbability
EstimationModels 127
Summary 131
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Contents vii
PARTTHREE
EstimationofOtherModelParameters
CHAPTER7
ACriticalParameter:LossGivenDefault 135
Introduction 135
AcademicModelsofLGD 135
DisentanglingLGDandPD 142
Moody’sKMV’sApproachtoLGDEstimation 143
Kamakura’sApproachtoLGDEstimation 146
Summary 146
CHAPTER8
TheCreditRiskofPortfoliosandCorrelations 148
Introduction 148
ModernPortfolioTheory(MPT):AnOverview 149
ApplyingMPTtoNontradedBondsandLoans 150
EstimatingCorrelationsacrossNontradedAssets 152
Moody’sKMV’sPortfolioManager 153
KamakuraandOtherReducedFormModels 161
Summary 165
PARTFOUR
PuttingtheParametersTogether
CHAPTER9
TheVARApproach:CreditMetricsandOtherModels 169
Introduction 169
TheConceptofValueatRisk 170
CapitalRequirements 177
TechnicalIssuesandProblems 180
ThePortfolioApproachinCreditMetrics 184
Summary 195
Appendix9.1:CalculatingtheForwardZero
CurveforLoanValuation 195
Appendix9.2:EstimatingUnexpectedLosses
UsingExtremeValueTheory 200
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viii CONTENTS
Appendix9.3:TheSimplifiedTwo-AssetSubportfolio
SolutiontotheN-AssetPortfolioCase 202
Appendix9.4:CreditMetricsandSwapCreditRisk 202
CHAPTER10
StressTestingCreditRiskModels:
AlgorithmicsMark-to-Future 208
Introduction 208
Back-TestingCreditRiskModels 209
UsingtheAlgorithmicsMark-to-FutureModel 215
StressTestingU.S.Banksin2009 220
Summary 227
CHAPTER11
RAROCModels 228
Introduction 228
WhatIsRAROC? 228
RAROC,ROA,andRORAC 229
AlternativeFormsofRAROC 230
TheRAROCDenominatorandCorrelations 235
RAROCandEVA 238
Summary 238
PARTFIVE
CreditRiskTransferMechanisms
CHAPTER12
CreditDerivatives 243
Introduction 243
CreditDefaultSwaps 244
CreditSecuritizations 259
FinancialFirms’UseofCreditDerivatives 269
CDSSpreadsandRatingAgencyRatingSystems 269
Summary 271
Appendix12.1:PricingtheCDSSpreadwith
CounterpartyCreditRiskExposure 272