Advanced Credit Risk Analysis and Management

Advanced Credit Risk Analysis and Management

Joseph, Ciby

74,88 €(IVA inc.)

Credit is essential in the modern world and creates wealth, provided it is used wisely. The Global Credit Crisis during 2008/2009 has shown that sound understanding of underlying credit risk is crucial. If credit freezes, almost every activity in the economy is affected. The best way to utilize credit and get results is to understand credit risk. Advanced Credit Risk Analysis and Management helps the reader to understand the various nuances of credit risk. It discusses various techniques to measure, analyze and manage credit risk for both lenders and borrowers. The book begins by defining what credit is and its advantages and disadvantages, the causes of credit risk, a brief historical overview of credit risk analysis and the strategic importance of credit risk in institutions that rely on claims or debtors. The book then details various techniques to study the entity level credit risks, including portfolio level credit risks. Authored by a credit expert with two decades of experience in corporate finance and corporate credit risk, the book discusses the macroeconomic, industry and financial analysis for the study of credit risk. It covers credit risk grading and explains concepts including PD, EAD and LGD. It also highlights the distinction with equity risks and touches on credit risk pricing and the importance of credit risk in Basel Accords I, II and III. The two most common credit risks, project finance credit risk and working capital credit risk, are covered in detail with illustrations. The role of diversification and credit derivatives in credit portfolio management is considered. It also reflects on how the credit crisis develops in an economy by referring to the bubble formation. The book links with the 2008/2009 credit crisis and carries out an interesting discussion on how the credit crisis may have been avoided by following the fundamentals or principles of credit risk analysis and management. The book is essential for both lenders and borrowers. Containing case studies adapted from real life examples and exercises, this important text is practical, topical and challenging. It is useful for a wide spectrum of academics and practitioners in credit risk and anyone interested in commercial and corporate credit and related products. INDICE: Preface xvii PART I INTRODUCTION 1 Credit Basics 3 1.1 Meaning of Credit 4 1.2 Role of Credit 6 1.3 Credit Market 6 1.4 Credit – Advantages and Disadvantages 7 1.5 Suppliers of Credit 11 1.6 Credit Risk Study 12 Appendix: Credit Creation 13 Questions/Exercises 14 2 Essentials of Credit Risk Analysis 15 2.1 Meaning of Credit Risk 15 2.2 Causes of Credit Risk 16 2.3 Credit Risk and Return 17 2.4 Credit Risk Analysis 17 2.5 Historical Progress of Credit Risk Analysis 19 2.6 Need for Credit Risk Analysis 19 2.7 Challenges of Credit Risk Analysis 22 2.8 Elements of Credit Risk Analysis 24 Questions/Exercises 25 3 Credit Risk Management 27 3.1 Strategic Position of Credit Risk Management 27 3.2 Credit Risk Management Context 28 3.3 Credit Risk Management Objectives 28 3.4 Credit Risk Management Structure 29 3.5 Credit Risk Culture 29 3.6 Credit Risk Appetite 30 3.7 Credit Risk Management in Non–Financial Firms 31 3.8 Credit Risk Management in Financial Intermediaries 31 Questions/Exercises 34 PART II FIRM (OR) OBLIGOR CREDIT RISK 4 Fundamental Firm/Obligor–Level Risks 37 4.1 Firm (or) Obligor Risk Classification 37 4.2 Risk Matrix 39 4.3 Different Risk Levels 39 Questions/Exercises 42 5 External Risks 43 5.1 Business Cycle 43 5.2 Economic Conditions 46 5.3 Inflation and Deflation 50 5.4 Balance of Payments and Exchange Rates 51 5.5 Political 52 5.6 Fiscal Policy 53 5.7 Monetary Policy 53 5.8 Demographic Factors 54 5.9 Regulatory Framework 55 5.10 Technology 55 5.11 Environment Issues 55 5.12 International Developments 56 5.13 Others 56 5.14 Monitoring External Risks 57 Questions/Exercises 58 6 Industry Risks 61 6.1 Understanding Obligor’s Industry or Market 61 6.2 Types of Industry Risks 63 6.3 Industry Life Cycle 64 6.4 Permanence of Industry 65 6.5 Government Support 65 6.6 Industry and Factors of Production 66 6.7 Industry and Business Cycles 66 6.8 Industry Profitability 67 6.9 Competitor/Peer Group Analysis 71 Questions/Exercises 77 7 Entity–Level Risks 79 7.1 Understanding the Activity 80 7.2 Risk Context and Management 81 7.3 Internal Risk Identification Steps 82 7.4 SWOT Analysis 83 7.5 Business Strategy Analysis 84 7.6 Pitfalls in Strategy 89 7.7 Management Analysis 90 7.8 Other Internal Risks 94 Questions/Exercises 97 8 Financial Risks 99 8.1 Importance of Financial Statements 99 8.2 Quality and Quantity of Financial Statements 101 8.3 Role of Historical Financial Statements 102 8.4 Financial Analysis 103 8.5 Analytical Tools 105 8.6 Solvency Ratios 115 8.7 Operational Ratios 123 8.8 Encapsulated Ratios 134 Questions/Exercises 143 9 Integrated View of Firm–Level Risks 147 9.1 Relevance of an Integrated View 147 9.2 Judgement 147 9.3 Identifying Significant Credit Risks 148 9.4 Risk Mitigants 150 9.5 Types of Mitigants 150 9.6 Principles to be Borne in Mind While Selecting Mitigants 153 9.7 Monitoring of Credit Risk 154 Appendix: Credit Risks and Possible Mitigants 155 Questions/Exercises 158 10 Credit Rating and Probability of Default 161 10.1 Credit Risk Grading 161 10.2 Probability of Default 163 10.3 External vs. Internal Rating 166 10.4 PD in Credit Structural Models 169 Questions/Exercises 172 PART III CREDIT RISKS – PROJECT AND WORKING CAPITAL 11 Credit Risks in Project Finance 177 11.1 Distinctive Features of Project Finance 177 11.2 Types of Project Finance 178 11.3 Reasons for Project Finance 179 11.4 Parties Involved in Project Finance 180 11.5 Phases of Project and Risks 182 11.6 Project Credit Risks 183 11.7 Financial Study 187 11.8 Project Credit Risk Mitigants 192 Questions/Exercises 202 12 Credit Risks inWorking Capital 207 12.1 Definition of Working Capital 207 12.2 Assessing Working Capital through the Balance Sheet 208 12.3 Working Capital Ratios 210 12.4 Working Capital Cycle 212 12.5 Working Capital vs. Fixed Capital 216 12.6 Working Capital Behaviour 216 12.7 Working Capital, Profitability and Cash Flows 223 12.8 Working Capital Risks 225 12.9 Impact of Working Capital Risks 229 12.10 Working Capital Risk Mitigants 230 12.11 Working Capital Financing 232 Questions/Exercises 236 PART IV CREDIT PORTFOLIO RISKS 13 Credit Portfolio Fundamentals 241 13.1 Credit Portfolio vs. Equity Portfolio 241 13.2 Criticality of Portfolio Credit Risks 242 13.3 Benefits of Credit Portfolio Study 242 13.4 Portfolio Analysis 247 13.5 Credit Portfolio Risk vs. Return 249 Appendix: Organizational Conflict in Credit Risk Management 249 Questions/Exercises 251 14 Major Portfolio Risks 253 14.1 Systematic Risk 253 14.2 Diversifiable Risk 255 14.3 Concentration 258 14.4 Credit Portfolio Beta 263 Questions/Exercises 263 15 Firm Risks to Portfolio Risks and Capital Adequacy 265 15.1 Obligor PD and Portfolio PD 265 15.2 Migration Risk 266 15.3 Default Risk 269 15.4 Loss Given Default (LGD) 270 15.5 Expected Loss (EL) 271 15.6 Provisioning 272 15.7 Credit Loss Distribution 274 15.8 Economic Capital 276 Questions/Exercises 282 16 Credit Risk and The Basel Accords 285 16.1 Basel Accords 285 16.2 Basel I (1988) – First Basel Accord 286 16.3 Basel Accord II (2006) 288 16.4 Basel III 296 Appendix 300 Questions/Exercises 302 PART V PORTFOLIO RISK MITIGANTS 17 Credit Risk Diversification 305 17.1 Traditional Diversification 305 17.2 Modern Diversification of Credit Portfolio 309 17.3 Correlations in Credit Risk Models 315 Questions/Exercises 315 18 Trading of Credit Assets 317 18.1 Syndicated Loans/Credit Assets 317 18.2 Securitization 318 18.3 Distressed Debt 321 18.4 Factoring 322 18.5 Distressed Receivables 322 Questions/Exercises 322 19 Credit Derivatives 323 19.1 Meaning of a Credit Derivative 323 19.2 Credit Default Swap (CDS) 324 19.3 Total Return Swap 330 19.4 Credit Option (CO) 332 19.5 Credit Spread Options (CSO) 333 19.6 Credit Derivative Linked Structures 333 19.7 Future of Credit Derivatives 334 19.8 Credit Derivatives and Over–the–Counter (OTC) Markets 334 Questions/Exercises 334 PART VI CREDIT RISK PRICING 20 Pricing Basics 337 20.1 Credit Pricing Factors 337 20.2 Pricing Structure 342 20.3 Credit Risk Pricing Model 344 20.4 Prime Lending Rate 345 Questions/Exercises 348 21 Pricing Methods 349 21.1 RORAC (Return on Risk–Adjusted Capital) Based Pricing 349 21.2 Market Determined 351 21.3 Economic Profit Based Pricing 351 21.4 Cost Plus 353 21.5 Structured Pricing 353 21.6 Grid Pricing 354 21.7 Net Present Value (NPV) Pricing 354 21.8 RANPV (Risk–Adjusted NPV) Pricing 355 Questions/Exercises 355 PART VII THE LAST LINE OF DEFENCE – SECURITY 22 Security Basics 359 22.1 Need for Security 359 22.2 Merits and Demerits of a Security 360 22.3 Attributes of a Good Security 362 22.4 Security and Pricing 362 22.5 Impact of Systematic Risks on Security 364 22.6 Facility Grades 364 Questions/Exercises 366 23 Collaterals and Covenants 367 23.1 Tangible Security 367 23.2 Intangible Security 369 23.3 Methods of Taking Security 371 23.4 Realizing Security 372 23.5 Covenants – A Trigger to Seek Additional Security 373 Questions/Exercises 377 PART VIII CREDIT CRISIS 24 Road to Credit Crisis 381 24.1 Credit and Growth 381 24.2 Role of Banks 382 24.3 Formation of Credit Bubbles 385 24.4 Types of Credit Bubble 386 24.5 Credit Bubble Explosion 387 Questions/Exercises 390 25 2008 Credit Crisis 393 25.1 Credit Asset – Prime vs. Sub–Prime 393 25.2 Securitization 394 25.3 US Housing Bubble 396 25.4 Role of OTC Derivatives 398 25.5 Role of Rating Agencies 400 25.6 Why Did the Bubble Burst? 401 25.7 Consequences 402 25.8 Impact of the Lehman Collapse 403 25.9 Housing Crisis to Credit Crisis to Economic Crisis 404 25.10 Common Factors 1929 vs. 2009 406 25.11 Lessons of the 2008 Credit Crisis 407 Questions/Exercises 410 Bibliography 411 Index 415

  • ISBN: 978-1-118-60491-5
  • Editorial: John Wiley & Sons
  • Encuadernacion: Cartoné
  • Páginas: 448
  • Fecha Publicación: 10/05/2013
  • Nº Volúmenes: 1
  • Idioma: Inglés