Credit Risk Management: Basic Concepts: financial risk components, rating analysis, models, economic and regulatory capital

553 Pages·2016·13.31 MB·English

by  Baesens B.

CreditRiskManagement
BasicConcepts:financialriskcomponents,
ratinganalysis,models,economicandregulatorycapital
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Credit Risk Management
Basic Concepts: financial risk components,
rating analysis, models, economic and regulatory capital
Dr. Ir. TONYVAN GESTEL
DexiaGroup,RiskManagementHolding
Prof. Dr. BART BAESENS
FacultyofBusinessandEconomics,
KatholiekeUniversiteitLeuven,Belgium
SchoolofManagement,UniversityofSouthampton,UnitedKingdom
VlerickLeuvenGhentManagementSchool,Belgium
1
3
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Preface
Credit risk management is undoubtedly among the most crucial issues in
the field of financial risk management. With the recent financial turmoil
and the regulatory changes introduced by Basel II, credit risk analysis and
riskassessmentingeneralhavebeenreceivingevengreaterattentionbythe
financialandbankingindustry.
The ability to discriminate good customers from bad ones is a highly
decisiveelementtobeasuccessfulplayerinthebankingandcreditindustry.
Predicting and mitigating default events is at the core of appropriate credit
riskmanagementandthiscanbegreatlyhelpedbyemployingsuitablequan-
titative models, without however precluding the reliance on human expert
judgment.
The optimal allocation of capital is also directly linked to appropriate
creditriskmodelsandhasdriventheinterestofbothacademicandindustrial
communities.TherecentlyestablishedBaselIICapitalAccordisanillustra-
tionofhowmoderncreditriskmanagementtechniquescanbetransformed
incapitaladequacyforbanks.
With their book, TonyVan Gestel and Bart Baesens provide newcomers
to the field of risk management with a careful introduction to the different
conceptsofcreditriskmanagement,withoutenteringintothetechnicalities
often associated with this subject. This book is therefore appropriate for
readers looking for a comprehensive and rigorous, yet accessible, descrip-
tionofthevariousconceptsunderlyingcreditriskmanagementtechniques
usedinmodernbanking.
PhilippeMaystadt,
presidentoftheEuropeanInvestmentBank
August2008
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Contents
Acknowledgements ix
Introduction xi
Chapterbychapteroverview xiii
1. Bankriskmanagement 1
1.1 Introduction 1
1.2 Bankinghistory 2
1.3 Roleofbanks 9
1.4 Balancesheet 17
1.5 Sourcesofrisk 23
1.6 Riskmanagement 38
1.7 Regulation 52
1.8 Financialproducts 59
2. Creditscoring 93
2.1 Introduction 93
2.2 Scoringatdifferentcustomerstages 95
2.3 Scoretypes 105
2.4 Creditbureaus 109
2.5 Overrides 111
2.6 Businessobjectives 112
2.7 Limitations 113
3. Creditratings 115
3.1 Introduction 115
3.2 Ratingandscoringsystems 117
3.3 Ratingterminology 118
3.4 Ataxonomyofcreditratings 121
3.5 Ratingsystemarchitecture 143
viii Contents
3.6 Ratingphilosophy 145
3.7 Externalratingagencies 148
3.8 Ratingsystematbanks 157
3.9 Applicationanduseofratings 162
3.10 Limitations 165
4. Riskmodellingandmeasurement 168
4.1 Introduction 168
4.2 Systemlifecycle 170
4.3 Overviewofratingsystemsandmodels 174
4.4 Datadefinitionandcollection 201
4.5 Development 251
4.6 Implementation 264
4.7 Applicationandfollow-up 265
4.8 Validation,qualitycontrolandbacktesting 266
5. Portfoliomodelsforcreditrisk 273
5.1 Introduction 273
5.2 Lossdistribution 274
5.3 Measuresofportfoliorisk 278
5.4 Concentrationandcorrelation 285
5.5 Portfoliomodelformulations 292
5.6 Overviewofindustrymodels 306
5.7 BaselIIportfoliomodel 312
5.8 Implementationandapplication 325
5.9 Economiccapitalandcapitalallocation 327
6. BaselII 344
6.1 Introduction 344
6.2 Bankcapital 350
6.3 Pillar1(minimumcapitalrequirements) 354
6.4 Pillar2(supervisoryreviewprocess) 418
6.5 Pillar3(marketdiscipline) 431
6.6 Informationtechnologyaspects 441
6.7 Marketimpact 452
6.8 Futureevolution 479
References 483
Index 519
Acknowledgements
It is a great pleasure to acknowledge the contributions and assistance of
manyindividualstothewritingofthisbook.Thisbookistheresultofmany
years of academic research and industry experience, throughout which we
have been involved in various social networks that all contributed to this
writinginsomeway.
Firstofall,wewouldliketothankoureditor,OxfordUniversityPress.We
aregratefultoAlisonJonesforcontactingusthreeyearsagowiththeideaof
writingabook,whichinfactturnedouttobeabookseries.Wewouldlike
toacknowledgethedirectandindirectcontributionsofthemanycolleagues
and friends with whom we collaborated during the last ten years. Olivier
Creignou, Marc Itterbeek, Christian Latouche, Geert Kindt, Daniel Saks,
Erik Verstraeten, Pierre Vérot, Damien Delas, Christine Lensel-Martinat,
Marc Declerc, Naji Freiha, Romain Arend, Olivier Vimard, Patrick Tetu,
Anne-Claire Balençon, Alain Probst, Yannick Vandewynckel, Joris Van
Helleputte,HuseyinUyar,MustafaAydin,SinanGül,S¸enolKahraman,Tom
Dewyspelaere,RonnyLangendries,MarcRonvaux,LaurentBalthazar,Joao
Garcia,ThomasAlderweireld,OlivierDebliquy,NicolasVanOystaeyenand
Nico Demuijnck shared their financial expertise with the interpretation of
the statistical results. Lyn Thomas, Jos De Brabanter, Bart Hamers, Gerd
Castermans, Karlien Vanden Branden, David Martens, Johan Huysmans,
JoachimJacobs,StevenMonsaertandHuguesJangaveususefulfeedback
with their expert knowledge on statistics, implementations, computations,
projectanddatabasemanagement.WesincerelythankClaudePiret,André
Delasnerie,HenriBonaque,EricHermann,RudiSneyers,LucLeonard,Jan
Vanthienen, Johan Suykens, Joos Vandewalle and Bart De Moor, for the
opportunities they gave us to work on the many challenges of Basel II and
for their moral support to complete this book series. Last but not least, we
gratefullyacknowledgeourfamiliesandparentsfortheirlove,supportand
encouragement.