Advanced Credit Risk Analysis and Management

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Credit Portfolio Fundamentals

The modern day credit executive – banker, finance manager, financier, for example – cannot do justice to their profession unless they know Portfolio Credit Risks. Ignoring portfolio credit risks can have catastrophic impact, even resulting in bankruptcies. The failure of many banks and financial institutions across the world can often be traced also to poor credit portfolios. The credit portfolio is critical to all business enterprises having sizeable credit exposures. Most modern day businesses cannot exist without a credit portfolio. Proper understanding of credit portfolio risk is a key success factor in enterprises with significant credit assets.

13.1 CREDIT PORTFOLIO VS. EQUITY PORTFOLIO

Most of the portfolio management techniques evolved in the equity arena first, and were then adapted by other areas like commodities, foreign exchange and credit markets. Portfolio management techniques such as portfolio theorem, swaps, options, etc. are some of the prominent examples. Large financial institutions are devoting considerable resources to developing new models for portfolio management. With advances in technology, the efforts of many brilliant researchers in large financial institutions, and the accumulation of significant bodies of knowledge on credit experience and analysis, credit portfolio management tools are likely to become more sophisticated in years to come. Since portfolio techniques have mostly originated in the context of equity, ...