Credit Risk Measurement In and Out of the Financial Crisis: New Approaches to Value at Risk and Other Paradigms, Third Edition

Credit Risk Measurement In and Out of the Financial Crisis: New Approaches to Value at Risk and Other Paradigms, Third Edition

by Anthony Saunders, Linda Allen
Released May 2010
Publisher(s): Wiley
ISBN: 9780470478349

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Book description

A classic book on credit risk management is updated to reflect the current economic crisis

Credit Risk Management In and Out of the Financial Crisis dissects the 2007-2008 credit crisis and provides solutions for professionals looking to better manage risk through modeling and new technology. This book is a complete update to Credit Risk Measurement: New Approaches to Value at Risk and Other Paradigms, reflecting events stemming from the recent credit crisis.

Authors Anthony Saunders and Linda Allen address everything from the implications of new regulations to how the new rules will change everyday activity in the finance industry. They also provide techniques for modeling-credit scoring, structural, and reduced form models-while offering sound advice for stress testing credit risk models and when to accept or reject loans.

  • Breaks down the latest credit risk measurement and modeling techniques and simplifies many of the technical and analytical details surrounding them

  • Concentrates on the underlying economics to objectively evaluate new models

  • Includes new chapters on how to prevent another crisis from occurring

Understanding credit risk measurement is now more important than ever. Credit Risk Management In and Out of the Financial Crisis will solidify your knowledge of this dynamic discipline.

Table of contents

  1. Title Page
  2. Copyright Page
  3. List of Abbreviations
  4. Preface
  5. PART One - Bubbles and Crises: The Global Financial Crisis of 2007-2009
    1. CHAPTER 1 - Setting the Stage for Financial Meltdown
      1. INTRODUCTION
      2. THE CHANGING NATURE OF BANKING
      3. REENGINEERING FINANCIAL INSTITUTIONS AND MARKETS
      4. SUMMARY
      5. APPENDIX 1.1: RATINGS COMPARISONS FOR THE THREE MAJOR RATING AGENCIES
    2. CHAPTER 2 - The Three Phases of the Credit Crisis
      1. INTRODUCTION
      2. BURSTING OF THE CREDIT BUBBLE
      3. PHASE 1: CREDIT CRISIS IN THE MORTGAGE MARKET
      4. PHASE 2: THE CRISIS SPREADS—LIQUIDITY RISK
      5. PHASE 3: THE LEHMAN FAILURE—UNDERWRITING AND POLITICAL INTERVENTION RISK
      6. SUMMARY
    3. CHAPTER 3 - The Crisis and Regulatory Failure
      1. INTRODUCTION
      2. CRISIS INTERVENTION
      3. LOOKING FORWARD: RESTRUCTURING PLANS
      4. SUMMARY
  6. PART Two - Probability of Default Estimation
    1. CHAPTER 4 - Loans as Options: The Moody's KMV Model
      1. INTRODUCTION
      2. THE LINK BETWEEN LOANS AND OPTIONS
      3. THE MOODY'S KMV MODEL
      4. TESTING THE ACCURACY OF EDF™ SCORES
      5. CRITIQUES OF MOODY'S KMV EDF™ SCORES
      6. SUMMARY
      7. APPENDIX 4.1: MERTON'S VALUATION MODEL
      8. APPENDIX 4.2: MOODY'S KMV RISKCALC™
    2. CHAPTER 5 - Reduced Form Models: Kamakura's Risk Manager
      1. INTRODUCTION
      2. DERIVING RISK-NEUTRAL PROBABILITIES OF DEFAULT
      3. GENERALIZING THE DISCRETE MODEL OF RISKY DEBT PRICING
      4. THE LOSS INTENSITY PROCESS
      5. KAMAKURA'S RISK INFORMATION SERVICES (KRIS)
      6. DETERMINANTS OF BOND SPREADS
      7. SUMMARY
      8. APPENDIX 5.1: UNDERSTANDING A BASIC INTENSITY PROCESS
    3. CHAPTER 6 - Other Credit Risk Models
      1. INTRODUCTION
      2. CREDIT SCORING SYSTEMS
      3. MORTALITY RATE SYSTEMS
      4. ARTIFICIAL NEURAL NETWORKS
      5. COMPARISON OF DEFAULT PROBABILITY ESTIMATION MODELS
      6. SUMMARY
  7. PART Three - Estimation of Other Model Parameters
    1. CHAPTER 7 - A Critical Parameter: Loss Given Default
      1. INTRODUCTION
      2. ACADEMIC MODELS OF LGD
      3. DISENTANGLING LGD AND PD
      4. MOODY'S KMV'S APPROACH TO LGD ESTIMATION
      5. KAMAKURA'S APPROACH TO LGD ESTIMATION
      6. SUMMARY
    2. CHAPTER 8 - The Credit Risk of Portfolios and Correlations
      1. INTRODUCTION
      2. MODERN PORTFOLIO THEORY (MPT): AN OVERVIEW
      3. APPLYING MPT TO NONTRADED BONDS AND LOANS
      4. ESTIMATING CORRELATIONS ACROSS NONTRADED ASSETS
      5. MOODY'S KMV'S PORTFOLIO MANAGER
      6. KAMAKURA AND OTHER REDUCED FORM MODELS
      7. SUMMARY
  8. PART Four - Putting the Parameters Together
    1. CHAPTER 9 - The VAR Approach: CreditMetrics and Other Models
      1. INTRODUCTION
      2. THE CONCEPT OF VALUE AT RISK
      3. CAPITAL REQUIREMENTS
      4. TECHNICAL ISSUES AND PROBLEMS
      5. THE PORTFOLIO APPROACH IN CREDITMETRICS
      6. SUMMARY
      7. APPENDIX 9.1: CALCULATING THE FORWARD ZERO CURVE FOR LOAN VALUATION
      8. APPENDIX 9.2: ESTIMATING UNEXPECTED LOSSES USING EXTREME VALUE THEORY
      9. APPENDIX 9.3: THE SIMPLIFIED TWO-ASSET SUBPORTFOLIO SOLUTION TO THE N-ASSET PORTFOLIO CASE
      10. APPENDIX 9.4: CREDITMETRICS AND SWAP CREDIT RISK
    2. CHAPTER 10 - Stress Testing Credit Risk Models: Algorithmics Mark-to-Future
      1. INTRODUCTION
      2. BACK-TESTING CREDIT RISK MODELS
      3. USING THE ALGORITHMICS MARK-TO-FUTURE MODEL
      4. STRESS TESTING U.S. BANKS IN 2009
      5. SUMMARY
    3. CHAPTER 11 - RAROC Models
      1. INTRODUCTION
      2. WHAT IS RAROC?
      3. RAROC, ROA, AND RORAC
      4. ALTERNATIVE FORMS OF RAROC
      5. THE RAROC DENOMINATOR AND CORRELATIONS
      6. RAROC AND EVA
      7. SUMMARY
  9. PART Five - Credit Risk Transfer Mechanisms
    1. CHAPTER 12 - Credit Derivatives
      1. INTRODUCTION
      2. CREDIT DEFAULT SWAPS
      3. CREDIT SECURITIZATIONS
      4. FINANCIAL FIRMS' USE OF CREDIT DERIVATIVES
      5. CDS SPREADS AND RATING AGENCY RATING SYSTEMS
      6. SUMMARY
      7. APPENDIX 12.1: PRICING THE CDS SPREAD WITH COUNTERPARTY CREDIT RISK EXPOSURE
    2. CHAPTER 13 - Capital Regulation
      1. INTRODUCTION
      2. THE 2006 BASEL II PLAN
      3. SUMMARY
      4. APPENDIX 13.1 LOAN RATING SYSTEMS
  10. Notes
  11. Bibliography
  12. Index

Product information

  • Title: Credit Risk Measurement In and Out of the Financial Crisis: New Approaches to Value at Risk and Other Paradigms, Third Edition
  • Author(s): Anthony Saunders, Linda Allen
  • Release date: May 2010
  • Publisher(s): Wiley
  • ISBN: 9780470478349