Actuarial Notes

The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures

By Sylvain Bouteillé and Diane Coogan-Pushner · John Wiley & Sons · 2022

Study guide: Exam INV-101

A roadmap to credit risk management (CRM) written for students and busy professionals, consistent with a commonly implemented risk management framework. Divided into four sections (Origination, Credit Assessment, Portfolio Management, and Mitigation and Transfer), it explains why CRM is critical to the success of large institutions and why organizational structure matters. The second edition updates its data, charts and content and adds three chapters, on consumer finance, state and local credit risk, and sovereign risk.

On the syllabus

  • Exam INV-101 — outcomes 3a and 3b: Ch. 1 Fundamentals of Credit Risk (background only); Ch. 4 Measurement of Credit Risk; Ch. 6 Fundamental Credit Analysis; Ch. 7 Alternative Estimations of Credit Quality; Ch. 13 Credit Portfolio Management

Preface

Acknowledgments

About the Companion Website

Part One Origination

1 Fundamentals of Credit Risk

  • What Is Credit Risk?
  • Types of Transactions That Create Credit Risk
  • Who Is Exposed to Credit Risk?
  • Why Manage Credit Risk?

2 Governance

  • Guidelines
  • Skills
  • Setting Limits
  • Oversight
  • Final Words

3 Checklist for Origination

  • Does the Transaction Fit into My Strategy?
  • Does the Risk Fit into My Existing Portfolio?
  • Do I Understand the Credit Risk?
  • Does the Seller Keep an Interest in the Deal?
  • Are the Proper Mitigants in Place?
  • Is the Legal Documentation Satisfactory?
  • Is the Deal Priced Adequately?
  • Do I Have the Skills to Monitor the Exposure?
  • Is There an Exit Strategy?
  • Final Words

Part Two Credit Assessment

4 Measurement of Credit Risk

  • Exposure
  • Probability of Default
  • The Recovery Rate
  • The Tenor
  • Direct versus Contingent Exposure
  • The Expected Loss

5 Dynamic Credit Exposure

  • Long-Term Supply Agreements
  • Derivative Products
  • The Economic Value of a Contract
  • Mark-to-Market Valuation
  • Value at Risk (VaR)

6 Fundamental Credit Analysis

  • Accounting Basics
  • A Typical Credit Report
  • Agency Conflict, Incentives, and Merton’s View of Default Risk
  • Final Words

7 Alternative Estimations of Credit Quality

  • The Evolution of an Indicator: Moody’s Analytics EDF™
  • Credit Default Swap Prices
  • Bond Prices
  • Final Words

8 Consumer Finance

  • What Is Consumer Finance?
  • Segmentation of Consumer Finance Products
  • Major Families of Consumer Finance Products
  • Assessment of Credit Quality
  • Decisions by Lenders
  • Regulatory Environment

9 State and Local Government Credit

  • State and Local Governments
  • Exposure Types
  • Assessing Credit Risk
  • Managing Credit Risk
  • Final Words

10 Sovereign Credit Risk

  • Sovereign Borrowers
  • Types of Sovereign Bonds
  • Sovereign Debt Market
  • Credit Analysis
  • Mitigation
  • Default and Recovery
  • Final Words

11 Securitization

  • Asset Securitization Overview
  • The Collateral
  • The Issuer
  • The Securities
  • Main Families of ABSs
  • Securitization for Risk Transfer
  • Credit Risk Assessment of ABS
  • Warehousing Risk
  • Final Words

12 Collateral Loan Obligations (CLOs)

  • Overview of the Corporate Loan Market
  • What Are CLOs?
  • Arbitrage CLOs
  • Balance Sheet CLOs
  • ABS CDOs
  • Credit Analysis of CLOs

Part Three Portfolio Management

13 Credit Portfolio Management

  • Level 1
  • Level 2
  • Level 3
  • Organizational Setup and Staffing
  • The IACPM
  • Final Words

14 Economic Capital and Credit Value at Risk (CVaR)

  • Capital: Economic, Regulatory, Shareholder
  • Defining Losses: Default versus Mark-to-Market (MTM)
  • Credit Value at Risk or CVaR
  • Creating the Loss Distribution
  • Active Portfolio Management and CVaR
  • Pricing
  • Final Words

15 Regulation

  • Doing Business with a Regulated Entity
  • Doing Business as a Regulated Entity
  • How Regulation Matters: Key Regulation Directives
  • Final Words

16 Accounting Implications of Credit Risk

  • Loan Impairment
  • Loan-Loss Accounting
  • Regulatory Requirements for Loan-Loss Reserves
  • Impairment of Debt Securities
  • Derecognition of Assets
  • Consolidation of Variable Interest Entities (VIEs)
  • Accounting for Netting
  • Hedge Accounting
  • Credit Valuation Adjustments, Debit Valuation Adjustments, and Own Credit Risk Adjustment
  • IFRS 7
  • Final Words

Part Four Mitigation and Transfer

17 Mitigating Derivative Counterparty Credit Risk

  • Measurement of Counterparty Credit Risk
  • Mitigation of Counterparty Credit Risk through Collateralization
  • Legal Documentation
  • Dealers versus End Users
  • Bilateral Transactions versus Central Counterparty Clearing
  • Prime Brokers
  • Repurchase Agreements
  • Final Words

18 Structural Mitigation

  • Transactions with Corporates
  • Transactions with Special Purpose Vehicles

19 Credit Insurance, Surety Bonds, and Letters of Credit

  • Credit Insurance
  • Surety Bonds
  • Letters of Credit or LoCs
  • The Providers’ Point of View
  • Final Words

20 Credit Derivatives

  • The Product
  • The Settlement Process
  • Valuation and Accounting Treatment
  • Uses of CDSs
  • Credit Default Swaps for Credit and Price Discovery
  • Credit Default Swaps and Insurance
  • Indexes, Loan CDSs, MCDSs, and ABS CDSs

21 Bankruptcy

  • What Is Bankruptcy?
  • Patterns of Bankrupt Companies
  • Signaling Actions
  • Examples of Bankruptcies
  • Final Words

About the Authors

Sources