Internal Credit Risk Models

Content

• on Basle, Regulation and Market Responses past and Present
• Origins of the Regulatory Capital Framework
  • Some Historical Perspectives
  • Historical Rational for the Capital Accord
  • Credit Risk, Regulatory Capital and the Basle Accord
  • Evolutionary Nature of Capital Regulation
  • Market Response: Clamour for Internal Credit Models
  • Game Theory: Regulatory Capital Arbitrage
  • Securitisation of Assets
  • Concerns Raised by Securitisation
  • Role of Credit Derivatives
  • Summary of Federal Deposit Insurance Corporation Improvement Act 1991
  • Regulatory Capital Rules
• Overview of Approach
• Essential Components of the Internal Credit Risk Model
  • Outline of Model Components
  • Preview of following Chapters
• Modelling Credit Risk
• Elements of Credit Risk
  • Default Risk
  • Measuring Default Probability - Empirical Method
  • Measuring Default Probability - The Options Theory Approach
  • Theoretical EDFs and Agency Ratings
  • Credit Risk Models
  • Value of Risk Debt
  • States of the Default Process and Credit Migration
  • Merton's Options Theory Approach to Risky Debt
  • Default Probability, the Default Point and the Distance to Default
  • Mathematical Preliminary
  • The Multi-State Default Process and the Probability Measure
• Loan Portfolios and Expected Loss
• Expected Loss
  • Adjusted Exposure: Outstandings and Commitments
  • Covenants
  • Adjusted Exposure
  • Usage Given Default
  • Loss Given Default and the Risky Part of V1
  • Mathematical Derivation of Expected Loss
  • Parameterising Credit Risk Models
• Unexpected Loss
• Causes of Unanticipated Risk
  • Unexpected Loss
  • Economic Capital and Unexpected Loss
  • Derivation of Unexpected Loss (UL)
• Portfolio Effects: Risk Contribution and Unexpected Losses
• Comparing Expected Loss and Unexpected Loss
  • The Analysis Horizon and Time to Maturity
  • Portfolio Expected Loss
  • Portfolio Unexpected Loss
  • Risk Contribution
  • Undiversifiable Risk
  • Risk Contribution and Correlation of Default
  • Variation in Asset Value due to Time Effects
  • Derivation of Portfolio UL
  • Derivation of Portfolio RCk
• Correlation of Default and Credit Quality
• Correlation of Credit Quality
  • Correlation of Default
  • Default Correlation Matrix and Some Important Observations
  • Industry Index and Asset Correlation
  • Estimating Asset Correlation
  • Obligor-Specific Risk
  • Further Generalisation to the Multifactor Case
  • Some Comments and Suggestions
  • Correlation of Default
  • First-Passage Time Model of Default Correlation
  • Industry Default Correlation Matrix
  • Correlation of Joint Credit Quality Movement
• Loss Distribution for Credit Default Risk
• Choosing the Proper Loss Distribution
  • The Beta Distribution
  • Economic Capital and Probability of Loss
  • Extreme Events: Fitting the Tail
• Monte Carlo Simulation of Loss Distribution
• Simulating the Loss Distribution
  • Some Observations from the Examples
  • Why EVT and not just Simulation
  • Mathematics of Loss Simulation
  • Simulating Default and the Default Point
• Extreme Value Theory
• Fundamental Regimes for Losses
  • Extreme Value Theory - Some Basics
  • Generalised Pareto Distribution
  • Convergence Criteria
  • Thresholds Revisited
  • The Mean Excess Function
  • History Repeating by Alexander McNeil
• Risk-Adjusted Performance Measurement
• Risk-Adjusted Performance Measurement
  • Raroc Defined
  • Dissecting the Raroc Equation
  • Approaches to Measurement: Top-down or Bottom-up
  • Revised RAPM
• Implementing the Internal Model across the Enterprise
• Sample Portfolio
  • Negative Raroc
  • Parameterising and Calibrating the Internal Model
  • Interpreting the Results of Raroc
  • Enterprise-Wide Risk Management and RAPM
  • Sample Credit Portfolio
  • on to the next Steps
• Credit Concentration and Required Spread
• The Credit Paradox
  • Causes of Concentration Risk
  • Credit Concentration and Required Spread
  • The Loan Pricing Calculator
  • Mathematics of the Loan Pricing Calculator
• Epilogue: The next Steps
• Internal Credit Risk Ratings
  • Data Quality and Opaqueness
  • Techniques for Assessing Extreme Loss Distributions
  • Risk-Adjusted Performance Measurement and Risk-Adjusted Pricing
  • Multi-State Default Process, Marking-to-Market and Multi-Year Analysis Horizons
  • Differences between Vendor Models
  • Integration of Market Risk and Credit Risk
  • The Multi-State Default Process
  • Matching Transition Matrices to Historical Data
• Appendix
• Raroc Remodelled
  • Tom Wilson
• Many Happy Returns
  • Sanjeev Punjabi
• Reconcilable Differences
  • H. Ugur Koyluoglu and Andrew Hickman
• Refining Ratings
  • Ross Miller
• A Credit Risk Toolbox
  • Angelo Arvanitis, Christopher Browne, Jon Gregory, and Richard Martin