Credit Portfolio Management: A Practitioner’s Guide to the Active Management of Credit Risks

281 Pages·2013·2.15 MB·English

by  Michael Hünseler (auth.)

Credit Portfolio Management
Also available
Gianluca Oricchio
Private Company Valuation
Michael Wong and Wilson Chan
Investing in Asian Offshore Currency Markets
Jamie Rogers
Strategy, Value and Risk
Guy Fraser-Sampson
Intelligent Investing
Ross McGill
US Withholding Tax
Credit Portfolio Management
A Practitioner’s Guide to the Active
Management of Credit Risks
Michael Hünseler
Managing Director, Assenagon Asset Management S.A.
© Michael Hünseler 2013
Foreword © Som-lok Leung 2013
Softcover reprint of the hardcover 1st edition 2013 978-0-230-39149-9
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The author has asserted his rights to be identified as the author of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2013 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries
ISBN 978-1-349-35162-6 ISBN 978-0-230-39150-5 (eBook)
DOI 10.1057/9780230391505
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations
of the country of origin.
A catalogue record for this book is available from the British Library.
A catalog record for this book is available from the Library of Congress.
10 9 8 77 6 5 44 3 2 1
22 21 20 19 18 17 16 15 14 13
To my family, Susi and Emmi, who are an inspiration beyond and
above any words to me. With their patience, encouragement and
trust, nothing seems impossible.
This page intentionally left blank
Contents
List of Tables xii
List of Figures xiii
Foreword by Som-lok Leung xvi
Preface xix
Acknowledgements xxii
List of Abbreviations xxiii
Part I Charting the Course– Credit Risk Strategies 1
1 The Case for Credit Portfolio Management 3
1.1 Evolution and innovation: ups and downs of credit 5
1.2 The age of credit crises 6
1.3 Credit risk management at the forefront 13
2 Credit Risk Strategies 18
2.1 The risk appetite framework 18
2.2 Risk culture 21
2.3 Credit risk strategies 25
2.3.1 Key requirements for an effective credit risk strategy 26
2.3.2 Credit risk strategy measures 26
2.4 Risk limits: framing the credit risk strategy 28
2.4.1 Forms of credit concentrations and regulatory view 32
2.4.2 Measurement of concentration risk 34
2.4.3 Concentration risk limits 36
2.4.3.1 Definition of risk limits 37
2.4.3.1.1 Risk limit object 37
2.4.3.1.2 Risk limit measures 37
2.4.3.2 Determination of risk limits 38
2.4.3.2.1 Quantitative risk limits 39
2.4.3.2.2 Qualitative risk limits:
underwriting standards 40
2.4.3.2.3 Consistency check 41
2.4.3.3 Limit monitoring 41
2.4.3.4 Management of limit breaches 41
2.4.4 Syndication risk limits 43
vii
viii Contents
3 What If: Credit Risk Stress Testing 45
3.1 Definition and objective of stress tests 47
3.2 Stressed scenarios 51
3.2.1 Hypothetical or macroeconomic scenarios 51
3.2.2 Historical or shock scenarios 52
3.2.3 Worst-case scenarios 53
3.2.4 Stress scenario requirements 53
3.3 Types of stress tests 54
3.3.1 Sensitivity analysis 55
3.3.2 Scenario analysis 55
3.3.3 What-if analysis 56
3.3.4 Concentration risk analysis 57
3.3.4.1 Single name concentration risk stress test 57
3.3.4.2 Sector concentration risk stress test 58
3.3.5 Reverse stress testing 58
3.4 Stress test information and subsequent mitigation 59
3.5 Conclusion 60
Part II Credit Portfolio Management in Practice 63
4 Evolution of Portfolio Management Business Models 65
4.1 From credit advisory to active credit portfolio
management 67
4.2 A full cycle approach to credit portfolio management 72
4.3 Bridging distinct worlds: loans, bonds and credit
derivatives 77
4.3.1 Asymmetric information in bank loans 78
4.3.2 Convergence of bank loans and debt capital markets
instruments 80
4.4 The role of loan transfer pricing 83
4.4.1 Risk-adjusted loan pricing 84
4.4.2 Loan transfer pricing 85
4.4.3 Loan transfer pricing based on observable loan
market prices 87
4.4.4 Loan transfer pricing based on observable
credit spreads 89
4.4.5 Transfer pricing based on generic curves 92
4.4.6 Risk adjusted versus transfer pricing 96
4.5 Practical implementation: organizational and
infrastructure challenges 98
4.5.1 Governance and mandate 99
4.5.2 Organizational design 102
4.5.3 Performance measurement and communication 105
Contents ix
4.5.4 Portfolio analytics and IT infrastructure 106
4.5.5 Implementation of an ACPM function 107
5 Accounting Complexity and Implications 109
5.1 Hedge accounting and other solutions for accounting
asymmetry 114
5.1.1 Hedge Accounting for Credit Risk 116
5.1.1.1 Types of hedge accounting and
requirements 117
5.1.1.2 Assessing fair value changes and
measuring hedge effectiveness 119
5.1.1.3 Hedge accounting eligible assets
and strategy 120
5.1.1.4 Conclusion 123
5.1.2 Fair valuing loans 124
5.1.2.1 FVO eligible assets and pricing 125
5.1.2.2 Regulatory requirements for application
of FVO 127
5.1.2.3 Conclusion 127
5.1.3 Financial Guarantee 128
5.1.3.1 Accounting rules for Financial Guarantees 129
5.1.3.2 Conclusion 130
5.1.4 Combination of hedge and reinvestment portfolio 131
5.1.4.1 DV01 neutral hedge and reinvestment
strategy 137
5.1.4.2 Beta neutral hedge and reinvestment
strategy 139
5.1.4.3 Notional neutral hedge and reinvestment
strategy 140
5.1.4.4 Cost (cash flow) neutral hedge and
reinvestment strategy 142
5.1.4.5 Conclusion 144
6 Regulatory Capital Management under Basel II 145
6.1 Capital optimization– key considerations 146
6.2 Regulatory capital relief through CDS and guarantees 148
6.2.1 Determination of capital relief amount 151
6.2.2 Adjustments in capital reduction for CRM 154
6.3 Conclusion 157
Part III Hedging Techniques and Toolkits 159
7 CDS: Hedging of Issuer and Counterparty Risks 165
7.1 Mechanism and conventions of CDS 168
7.1.1 Transaction terms and conditions 169