Credit Risk: Measurement, Evaluation and Management PDF
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Credit Risk Contributions to Economics http://www.springer.de/cgi-hinlsearch_hook.pl?series=1262 Further volumes of this series can Alberto Quadrio CurziolMarco Fortis (Eds.) be found at our homepage. Complexity and Industrial Clusters 2002. ISBN 3-7908-1471-7 Kirstin Hubrich Friedel BolleIMarco Lehmann-Waffenschmidt Cointegration Analysis in a German (Eds.) Monetary System Surveys in Experimental Economics 2001. ISBN 3-7908-1352-4 2002. ISBN 3-7908-1472-5 Nico Heerink et al. (Eds.) Pablo Coto-Millan Economic Policy and Sustainable Land Use General Equilibrium and Welfare 2001. ISBN 3-7908-1351-6 2002. ISBN 7908-1491-1 Wojciech W. Charernza/Krystyna Strzala (Eds.) Friedel BollelMichael Carlberg (Eds.) East European Transition and EU Advances in Behavioral Economics Enlargement 2001. ISBN 3-7908-1358-3 2002. ISBN 3-7908-1501-2 Volker Grossmann Natalja von Westernhagen Inequality, Economic Growth, and Systemic Transformation, Trade and Technological Change Economic Growth 2001. 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Rachev Thomas Ridder Karl-Heinz Vollmer Editors Credit Risk Measurement, Evaluation and Management With 85 Figures and 47 Tables Physica-Verlag A Springer-Verlag Company Preface On March 13th - 15th 2002, the 8th Econometric Workshop in Karlsruhe was held at the University of Karlsruhe (TH), Germany. The workshop was or ganized jointly by the Institute for Statistics and Mathematical Economics and the Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main (DZ Bank AG, formerly SGZ-Bank AG). Almost 200 participants participated, discussing new developments in the measurement, evaluation and management of credit risk. This volume presents selected contributions to the conference, of which a short survey follows: Arne Benzin, Stefan Truck and Svetlozar T. Rachev present the main features of the new Basel Capital Accord (Basel II). They include a survey of the two regulatory approaches to credit risk: the standardized and the internal rating based approach. Christian Bluhm and Ludger Overbeck use the CreditMetrics/KMV one factor model to discuss the quantification of systematic risk by estimation of asset correlations in homogeneous portfolios. Based on this concept the Basel-II proposal to fix asset correlation for corporate loans at the 20% level is compared with empirical data. Dylan D'Souza, Keyvan Amir-Atefi and Borjana Racheva-Jotova inves tigate empirically how different distributional assumptions governing bond price uncertainty effect the price of a credit default swap. They use the two factor Hull-White-model and the extension of the fractional recovery model of Duffie-Singleton given by Sch6nbucher. Prices are compared under the as sumption of a Gaussian and a non-Gaussian distribution for the underlying risk factors. Christoph Heidelbach and Werner Kurzinger point out the consequences of Basel II for the DaimlerChrysler Bank, a bank with a special profile as a provider of automotive financial services. Alexander Karmann and Dominik Maltritz present a quantification of the probability that a nation will default on repayment obligations in foreign currency. They adopt the approach introduced by Merton, considering as un derlying process the nation's ability-to-pay modeled by the sum of future Series Editors Werner A. Muller Martina Bihn Editors Prof. Dr. Gholamreza Nakhaeizadeh Prof. Dr. Georg Bol DaimlerChrysler AG Prof. Dr. Svetlozar T. Rachev RIC/AM Prof. Dr. Karl-Heinz Vollmer Postbox 2360 Institut fUr Statistik 89013 Ulm und Mathematische Wirtschaftstheorie Germany Universitat Karlsruhe 76128 Karlsruhe Dr. Thomas Ridder Germany DZ Bank AG COR Platz der Republik 60265 Frankfurt am Main Germany E-Mails: [email protected] [email protected] karl-heinz. [email protected] [email protected] [email protected] ISSN 1431-1933 ISBN-13: 978-3-7908-0054-8 e-ISBN-13: 978-3-642-59365-9 DOl: 10.1007/978-3-642-59365-9 Cataloging-in-Publication Data applied for A catalog record for this book is available from the Library of Congress. Bibliographic information published by Die Deutsche Bibliothek Die Deutsche Bibliothek lists this publication in the Deutsche Nationalbibliografie; detailed bibliographic data is available in the Internet at <http://dnb.ddb.de>. This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Physica-Verlag. Viola tions are liable for prosecution under the German Copyright Law. Physica-Verlag Heidelberg New York a member of BertelsmannSpringer Science+Business Media GmbH http://www.springer.de © Physic a-Verlag Heidelberg 2003 The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Softcover Design: Erich Kirchner, Heidelberg SPIN 10924549 88/3130IDK-5 4 3 2 I 0 VI Preface payment surpluses. The method is successfully demonstrated on the examples of Latin America and Russia. Rudiger Kiesel, William Perraudin and Alex Taylor examine the practical aspects of using techniques from Extreme Value Theory (EVT) to estimate Value-at-Risk (VAR). They compare the performance of EVT estimators with estimators of VAR which are based on quantiles of empirical return distribu tions. The two types of estimators are shown to yield almost identical results for commonly used confidence levels. Daniel Kluge and Frank Lehrbass consider default probabilities in struc tured commodity finance. While banks usually base investment decisions on cash flow modeling, they point out that the default risk of a project actually depends on the "combined downside risk" of spot price and production level movements. They present a workable approach to the measurement of this risk. Filip Landskog, Alexander McNeil and Uwe Schmock start from the fact that some multivariate financial time series data are more plausibly modeled by an elliptical distribution other than the multivariate normal distribution. In that case, they propose estimation of the correlation by using Kendall's tau and the relation between tau and the linear correlation coefficient. They demonstrate that the well-known relation for the bivariate normal distribution generalizes to the class of elliptical distributions. Marlene Muller and Wolfgang HardIe present semiparametric extensions of the logit-model which allow nonlinear relationships. The technique is based on the theory of generalized partial linear models and is used for credit risk scoring and the estimation of default probabilities. Borjana Racheva-Jotova, Stoyan Stoyanov and Svetlozar T. Rachev illus trate a new approach for integrated market and credit risk management using Cognity software. The Cognity Credit Risk System comprises two models, the Asset Value Approach and the Stochastic Default Rate Model, both based on Stable distributions. Thomas Rempel-Oberem, Rainer Klingeler and Peter Martin discuss a novel approach to the determination of default events which was developed for two different credit institutions. It is based on the CreditRisk+ model, which was modified and extended to meet the particular requirements and standards of these institutions. Ingo SchaI states principles of internal rating systems for corporate clients and presents his practical experience with building such systems. He pro poses proceeding in two steps. First, each individual credit is evaluated with respect to expected exposure at default, expected default frequency and ex pected recovery rate. The second step is calculation of the correlations given the portfolio structure. This permits active portfolio management. He also describes how the quality of rating systems can be measured and gives basic requirements for backtesting. Frank Schlottmann and Detlev Seese are concerned with computational aspects of the risk-return analysis of portfolios. They show that risk analysis Preface VII requires the computation of a set of Pareto-efficient portfolio structures in a non-linear, nonconvex setting with additional constraints. They develop a new fast and flexible framework for solving this problem, using a hybrid heuris tic method which combines a multi-objective evolutionary algorithm with a problem-specific local search. Empirical results demonstrate the advantage of the procedure. Rafael Schmidt develops a model of dependence using elliptical copulae. He embeds the concepts of tail dependence and elliptical copulae into the framework of Extreme Value Theory and provides a parametric and a non parametric estimator for the tail dependence coefficient. Finally, Stefan Truck and Jochen Peppel give a review on credit risk models in practice. The first model is the structural model introduced by Merton and modified to the "distance-to-default" methodology of KMV. The second class are the Value-at-Risk models with CreditMetrics of JP Morgan, which use historical transition matrices. The third major approach is that proposed by Credit Suisse Financial Products with CreditRisk+. The paper closes with a brief description of CreditPortfolioView by McKinsey and the one-factor model proposed by the Basel Committee on banking supervision. Many people have contributed to the success of the workshop: Irina Gartvihs did the major part of organizing the workshop. Bernhard Martin, Christian Menn, Theda Schmidt and Stefan Truck also proved indispensable for its organization. Tim G61z and Matthias Rieber were responsible for the technical infrastructure while Thomas Plum prepared the layout of the book. All of their help is very much appreciated. The organization committee wishes also to thank the Fakultat fur Wirtschaftswissenschaften, the dean Prof. Dr. Hartmut Schmeck and the managing director Dr. Volker Binder for their co operation. Last but not least we thank the DaimlerChrysler AG for their sponsorship. Karlsruhe, February 2003 The Editors Contents Approaches to Credit Risk in the New Basel Capital Accord Arne Benzin, Stefan TrUck, Svetlozar T. Rachev . . . . . . . . . . . . . . . . . . . . . 1 Systematic Risk in Homogeneous Credit Portfolios Christian Bluhm, Ludger Overbeck ................................ 35 Valuation of a Credit Default Swap: The Stable Non-Gaussian versus the Gaussian Approach Dylan D'Souza, Keyvan Amir-Ateji, Borjana Racheva-Jotova .......... 49 Basel II in the DaimlerChrysler Bank Christoph Heidelbach, Werner Kurzinger ............................ 85 Sovereign Risk in a Structural Approach. Evaluating Sovereign Ability-to-Pay and Probability of Default Alexander Karmann, Dominik Maltritz ............................. 91 An Extreme Analysis of VaRs for Emerging Market Benchmark Bonds Rudiger Kiesel, William Perraudin, Alex Taylor ..................... 111 Default Probabilities in Structured Commodity Finance Daniel Kluge, Frank Lehrbass ...................................... 139 Kendall's Tau for Elliptical Distributions Filip Lindskog, Alexander McNeil, Uwe Schmock .................... 149 Exploring Credit Data Marlene Muller, Wolfgang Hardle ................................. 157 Stable Non-Gaussian Credit Risk Model; The Cognity Approach Borjana Racheva-Jotova, Stoyan Stoyanov, Svetlozar T. Rachev ....... 175 X Contents An Application of the CreditRisk+ Model Thomas Rempel-Oberem, Rainer Klingeler, Peter Martin ............. 195 Internal Ratings for Corporate Clients Ingo Schiil ...................................................... 207 Finding Constrained Downside Risk-Return Efficient Credit Portfolio Structures Using Hybrid Multi-Objective Evolutionary Computation Frank Schlottmann, DetZef Seese ................................... 231 Credit Risk Modelling and Estimation via Elliptical Copulae Rafael Schmidt .................................................. 267 Credit Risk Models in Practice - a Review Stefan TrUck, lochen Peppel ....................................... 291 List of Authors ................................................ 331 A pproaches to Credit Risk in the New Basel Capital Accord Arne Benzin 1, Stefan Triick2, and Svetlozar T. Rachev3 1 Lehrstuhl fUr Versicherungswissenschaft, Universitat Karlsruhe, Germany 2 Institut fiir Statistik und Mathematische Wirtschaftstheorie, Universitat Karlsruhe, Germany 3 Institut fiir Statistik und Mathematische Wirtschaftstheorie, Universitat Karlsruhe, Germany Summary. We discuss the main features of the new Basel Capital Accord (Basel II) concerning the regulatory measurement of Credit Risk. After an overview of the basic ideas in the new accord the determining aspects of the approaches to Credit risk in the new capital accord are surveyed: the standardized approach (STD) as well as the two forms of the internal rating based (IRB) approach -foundation and advanced. We describe the issues of the second consultative document of the new accord and describe how to measure the required capital. Further the fair comment on several features of Basel II and its possible changes in the final version of the accord are illustrated. 1 Introduction 1.1 The History of the Basel Capital Standards More than a decade has passed since the Basel Committee on Banking Su pervision4 (the Committee) introduced its 1988 Capital Accord (the Accord). The major impetus for this Basel I Accord was the concern of the governors of the central banks that the capital - as a "cushion" against losses - of the world's major banks had become dangerously low after persistent erosion through competition. Since 1988 the business of banking, risk management practices, supervisory approaches and financial markets have undergone significant transformations. Consequently, the Committee released a proposal in June 1999 to replace the old Accord with a more risk-sensitive framework, the New Basel Capital Ac cord (Basel II). After receiving several comments by the industry and research 4 The Basel Committee on Banking Supervision (BCBS) is a committee of central banks and bank supervisors from the major industrialised countries that meet every three months at the Bank for International Settlements (BIS) in Basel. G. Bol et al. (eds.), Credit Risk © Physica-Verlag Heidelberg 2003
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