Credit Risk Management In and Out of the Financial Crisis: New Approaches to Value at Risk and Other Paradigms (Wiley Finance) PDF
Preview Credit Risk Management In and Out of the Financial Crisis: New Approaches to Value at Risk and Other Paradigms (Wiley Finance)
E1FFIRS 02/27/2010 1:15:59 Page1 Credit Risk Measurement In and Out of the Financial Crisis E1FFIRS 02/27/2010 1:15:59 Page2 Founded in 1807, John Wiley & Sons is the oldest independent publishing companyintheUnitedStates.WithofficesinNorthAmerica,Europe,Aus- tralia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional andpersonalknowledgeandunderstanding. TheWileyFinanceseriescontainsbookswrittenspecificallyforfinance and investment professionals as well as sophisticated individual investors andtheirfinancialadvisors.Booktopicsrangefromportfoliomanagement to e-commerce, risk management, financial engineering, valuation and financialinstrumentanalysis,aswellasmuchmore. For a list of available titles, please visit our Web site at www.Wiley Finance.com. E1FFIRS 02/27/2010 1:15:59 Page3 Credit Risk Measurement In and Out of the Financial Crisis New Approaches to Value at Risk and Other Paradigms Third Edition ANTHONY SAUNDERS LINDA ALLEN John Wiley & Sons, Inc. E1FFIRS 02/27/2010 1:15:59 Page4 Copyright#2010byAnthonySaundersandLindaAllen.Allrightsreserved. PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey. PublishedsimultaneouslyinCanada. 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Wileyalsopublishesitsbooksinavarietyofelectronicformats.Somecontentthatappearsin printmaynotbeavailableinelectronicbooks.FormoreinformationaboutWileyproducts, visitourwebsiteatwww.wiley.com. LibraryofCongressCataloging-in-PublicationData: Saunders,Anthony,1949- Creditriskmanagementinandoutofthefinancialcrisis:newapproachestovalueatrisk andotherparadigms/AnthonySaunders,LindaAllen.—3rded. p.cm.—(Wileyfinanceseries) Rev.ed.of:Creditriskmeasurement.2nded.c2002. Includesbibliographicalreferencesandindex. ISBN978-0-470-47834-9(cloth) 1. Bankloans. 2. Bankmanagement. 3. Credit—Management. 4. Riskmanagement. I. Allen,Linda,1954- II. Saunders,Anthony,1949-Creditriskmeasurement. III. Title. HG1641.S332010 0 332.120684—dc22 2009044765 PrintedintheUnitedStatesofAmerica 10 9 8 7 6 5 4 3 2 1 E1FTOC 03/15/2010 16:45:21 Page5 Contents ListofAbbreviations xi Preface xv PARTONE BubblesandCrises:TheGlobalFinancialCrisisof2007–2009 CHAPTER1 SettingtheStageforFinancialMeltdown 3 Introduction 3 TheChangingNatureofBanking 3 ReengineeringFinancialInstitutionsandMarkets 17 Summary 21 Appendix1.1:RatingsComparisonsfortheThreeMajor RatingAgencies 23 CHAPTER2 TheThreePhasesoftheCreditCrisis 24 Introduction 24 BurstingoftheCreditBubble 24 Phase1:CreditCrisisintheMortgageMarket 29 Phase2:TheCrisisSpreads—LiquidityRisk 33 Phase3:TheLehmanFailure—Underwritingand PoliticalInterventionRisk 37 Summary 43 CHAPTER3 TheCrisisandRegulatoryFailure 45 Introduction 45 CrisisIntervention 45 v E1FTOC 03/15/2010 16:45:21 Page6 vi CONTENTS LookingForward:RestructuringPlans 52 Summary 64 PARTTWO ProbabilityofDefaultEstimation CHAPTER4 LoansasOptions:TheMoody’sKMVModel 67 Introduction 67 TheLinkbetweenLoansandOptions 67 TheMoody’sKMVModel 70 TestingtheAccuracyofEDFTMScores 74 CritiquesofMoody’sKMVEDFTMScores 86 Summary 93 Appendix4.1:Merton’sValuationModel 93 Appendix4.2:Moody’sKMVRiskCalcTM 95 CHAPTER5 ReducedFormModels:Kamakura’sRiskManager 98 Introduction 98 DerivingRisk-NeutralProbabilitiesofDefault 99 GeneralizingtheDiscreteModelofRiskyDebtPricing 102 TheLossIntensityProcess 105 Kamakura’sRiskInformationServices(KRIS) 108 DeterminantsofBondSpreads 110 Summary 114 Appendix5.1:UnderstandingaBasic IntensityProcess 114 CHAPTER6 OtherCreditRiskModels 117 Introduction 117 CreditScoringSystems 117 MortalityRateSystems 121 ArtificialNeuralNetworks 125 ComparisonofDefaultProbability EstimationModels 127 Summary 131 E1FTOC 03/15/2010 16:45:21 Page7 Contents vii PARTTHREE EstimationofOtherModelParameters CHAPTER7 ACriticalParameter:LossGivenDefault 135 Introduction 135 AcademicModelsofLGD 135 DisentanglingLGDandPD 142 Moody’sKMV’sApproachtoLGDEstimation 143 Kamakura’sApproachtoLGDEstimation 146 Summary 146 CHAPTER8 TheCreditRiskofPortfoliosandCorrelations 148 Introduction 148 ModernPortfolioTheory(MPT):AnOverview 149 ApplyingMPTtoNontradedBondsandLoans 150 EstimatingCorrelationsacrossNontradedAssets 152 Moody’sKMV’sPortfolioManager 153 KamakuraandOtherReducedFormModels 161 Summary 165 PARTFOUR PuttingtheParametersTogether CHAPTER9 TheVARApproach:CreditMetricsandOtherModels 169 Introduction 169 TheConceptofValueatRisk 170 CapitalRequirements 177 TechnicalIssuesandProblems 180 ThePortfolioApproachinCreditMetrics 184 Summary 195 Appendix9.1:CalculatingtheForwardZero CurveforLoanValuation 195 Appendix9.2:EstimatingUnexpectedLosses UsingExtremeValueTheory 200 E1FTOC 03/15/2010 16:45:21 Page8 viii CONTENTS Appendix9.3:TheSimplifiedTwo-AssetSubportfolio SolutiontotheN-AssetPortfolioCase 202 Appendix9.4:CreditMetricsandSwapCreditRisk 202 CHAPTER10 StressTestingCreditRiskModels: AlgorithmicsMark-to-Future 208 Introduction 208 Back-TestingCreditRiskModels 209 UsingtheAlgorithmicsMark-to-FutureModel 215 StressTestingU.S.Banksin2009 220 Summary 227 CHAPTER11 RAROCModels 228 Introduction 228 WhatIsRAROC? 228 RAROC,ROA,andRORAC 229 AlternativeFormsofRAROC 230 TheRAROCDenominatorandCorrelations 235 RAROCandEVA 238 Summary 238 PARTFIVE CreditRiskTransferMechanisms CHAPTER12 CreditDerivatives 243 Introduction 243 CreditDefaultSwaps 244 CreditSecuritizations 259 FinancialFirms’UseofCreditDerivatives 269 CDSSpreadsandRatingAgencyRatingSystems 269 Summary 271 Appendix12.1:PricingtheCDSSpreadwith CounterpartyCreditRiskExposure 272
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