The Handbook of Credit Risk Management

Transcription

1 The Handbook of Credit Risk Management Originating, Assessing, and Managing Credit Exposures SYLVAIN BOUTEILLE DIANE COOGAN-PUSHNER WILEY John Wiley & Sons, Inc.

2 Contents Preface Acknowledgments xiii xxi Origination CHAPTER 1 Fundamentals of Credit Risk 8 What Is Credit Risk? 3 Types of Transactions That Create Credit Risk 5 Who Is Exposed to Credit Risk? 9 Why Manage Credit Risk? 18 CHAPTER 2 Governance 21 Guidelines 22 Setting Limits 25 Skills 26 Oversight 29 Checklist for Origination 38 Does the Transaction Fit into My Strategy? 34 Does the Risk Fit into My Existing Portfolio? 35 Do I Understand the Credit Risk? 36 Does the Seller Keep an Interest in the Deal? 37 Are the Proper Mitigants in Place? 38 Is the Legal Documentation Satisfactory? 38 Is the Deal Priced Adequately? 39 Do I Have the Skills to Monitor the Exposure? 40 Is There an Exit Strategy? 40 Vll

3 Vlll CONTENTS PART TWO-,, r^- rr.._,, r..,,.,_..,,,,^.. r=:., =:T.,. T._^=: ^,.,^^._. T. Credit Assessment CHAPTER 4 Measurement of Credit Risk Exposure Default Probability The Recovery Rate The Tenor Direct versus Contingent Exposure The Expected Loss Dynamic Credit Exposure Long-Term Supply Agreements Derivative Products The Economic Value of a Contract Mark-to-Market Valuation Value at Risk (VaR) Fundamental Credit Analysis Accounting Basics A Typical Credit Report Agency Conflict, Incentives, and Merton's View of Default Risk CHAPTER 7 Alternative Estimations of Crodlt Quality The Evolution of an Indicator: Moody's Analytics EDF Credit Default Swap Prices Bond Prices CHAPTER 8 Securitization Asset Securitization Overview The Collateral The Issuer The Securities Main Families of ABS Securitization for Risk Transfer

4 Contents ; [X Credit Risk Assessment of ABS 137 Warehousing Risk 138 PARTTHREE Portfolio Management Credit Portfolio Management 148 Level Level Level Organizational Set-Up and Staffing 155 The IACPM 156 CHAPTER 10 Economic Capital and Credit Value at Risk (CVaR) 158 Capital: Economic, Regulatory, Shareholder 160 Defining Losses: Default versus Mark-to-Market 163 Credit Value at Risk or CVaR 165 Creating the Loss Distribution 171 Active Portfolio Management and CVaR 179 Pricing 181 CHAPTER 11 Regulation 188 Doing Business with a Regulated Entity 184 Doing Business as a Regulated Entity 189 How Regulation Matters: Key Regulation Directives 190 CHAPTER 12 Accounting Implications of Credit Risk 201 Loan Impairment 202 Loan-Loss Accounting 203 Regulatory Requirements for Loan-Loss Reserves 205 Impairment of Debt Securities 206 Derecognition of Assets 207 Consolidation of Variable Interest Entities (VIEs) 208 Accounting for Netting 209 Hedge Accounting 211 Credit Valuation Adjustments, Debit Valuation Adjustments and Own Credit Risk Adjustment 212 IFRS 7 213

5 CONTENTS PART FOUR._._-_.._ -.-_. Mitigation and Transfer CHAPTER 13 Mitigating Derivative Counterparty Credit Risk 217 Measurement of Counterparty Credit Risk 217 Mitigation of Counterparty Credit Risk through Collateralization 218 Legal Documentation 225 Dealers versus End-Users 226 Bilateral Transactions versus Central Counterparty Clearing 227 Prime Brokers 229 Repurchase Agreements 230 Final Words 232 CHAPTER 14 Structural Mitigation 283 Transactions with Corporates 234 Segmentation of the Commercial Loan Market Senior versus Junior Debt Secured versus Unsecured Loans Covenants Events of Default Transactions with Special Purpose Vehicles 240 Impact of Structural Mitigants on Default Probability Impact of Structural Mitigants on Recovery Rates Senior/Subordinated Structures Credit Enhancement CHAPTER 16 Credit insurance, Surety Bonds, and Letters of Credit 248 Credit Insurance 250 Surety Bonds 255 Letters of Credit or LoCs 258 The Providers'Point of View 263 CHAPTER 16 Credit Derivatives 267 The Product 267 The Settlement Process 270 Valuation and Accounting Treatment 274

6 Contents Xj Uses of CDS 276 Credit Default Swaps for Credit and Price Discovery 280 Credit Default Swaps and Insurance 280 Indexes, Loan CDSs, MCDSs, and ABS CDSs 280 CHAPTER 17 Collateral Debt Obligations (CDOs) 283 What Are CDOs? 283 CoUateralized Loan Obligations or CLOs 286 Arbitrage CLOs 287 Balance Sheet CLOs 290 ABS CDOs 292 Credit Analysis of CDOs 296 CHAPTER 18 Bankruptcy 801 What Is Bankruptcy? 301 Patterns of Bankrupt Companies 303 Signaling Actions 306 Examples of Bankruptcies 307 About the Authors 311 Index 313