The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures, 2nd Edition

Preface

Acknowledgments

Part I: Origination

Chapter 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?

Chapter 2: Governance

Guidelines

Setting Limits

Authorizing Transactions

Staffing

Final Words

Chapter 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 II: Credit Assessment

Chapter 4: Measurement of Credit Risk

Exposure

Default Probability

The Recovery Rate

The Tenor

Direct vs. Contingent Exposure

The Expected Loss

Chapter 5: Dynamic Credit Exposure

Long-Term Supply Agreements

Derivative Products

The Economic Value of a Contract

Mark-to-Market Valuation

Value-at-Risk (VaR)

Chapter 6: Fundamental Credit Analysis

Accounting Basics

A Typical Credit Report

Agency Conflict, Incentives, and Merton’s View of Default Risk

Final Words

Chapter 7: Alternative Estimations of Credit Quality

The Evolution of an Indicator: Moody’s Analytics EDF™

Credit Default Swap Prices

Bond Prices

Final Words

Chapter 8: Securitization

Asset Securitization Overview

The Collateral

The Issuer

The Securities

Main Families of ABS

Securitization for Risk Transfer

Credit Risk Assessment of ABS

Warehousing Risk

Final Words

Part III: Portfolio Management

Chapter 9: Credit Portfolio Management

Level 1

Level 2

Level 3

Organizational Set-Up and Staffing

The IACPM

Final Words

Chapter 10: Economic Capital and Credit Value at Risk (CVaR)

Capital: Economic, Regulatory, Shareholder

Defining Losses: Default vs. Mark-to-Market

Credit Value at Risk or CVaR

Creating the Loss Distribution

Active Portfolio Management and CVaR

Pricing

Final Words

Chapter 11: Regulation

Doing Business with a Regulated Entity

Doing Business as a Regulated Entity

How Regulation Matters: Key Regulation Directives

Final Words

Chapter 12: 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 VIEs

Accounting for Netting

Hedge Accounting

Credit Valuation Adjustments, Debit Valuation Adjustments and Own Credit Risk Adjustment

IFRS 7

Final Words

Part IV: Mitigation and Distribution

Chapter 13: Mitigating Derivative Counterparty Credit Risk

Measurement of Counterparty Credit Risk

Mitigation of Counterparty Credit Risk through Collateralization

Legal Documentation

Dealers vs. End-Users

Bilateral Transactions vs. Central Counterparty Clearing

Prime Brokers

Repurchase Agreements

Final Words

Chapter 14: Structural Mitigation

Transactions with Corporates

Transactions with Special Purpose Vehicles

Chapter 15: Credit Insurance, Surety Bonds and Letters of Credit

Credit Insurance

Surety Bonds

Letters of Credit or LoCs

The Providers’ Point of View

Final Words

Chapter 16: Credit Derivatives

The Product

The Settlement Process

Valuation and Accounting Treatment

Uses of CDS

CDS for Credit and Price Discovery

CDS and insurance

LCDS, Indexes, MCDS and ABSCDS

Chapter 17: Collateral Debt Obligations or CDOs

What are CDOs?

Collateralized Loan Obligations or CLOs

Arbitrage CLOs

Balance Sheet CLOs

ABS CDOs

Credit Analysis of CDOs

Final Words

Chapter 18: Bankruptcy

What is Bankruptcy?

Patterns of Bankrupt Companies

Signaling Actions

Examples of Bankruptcies

Final Words

Conclusion

About the Authors

Index

Sylvain Bouteillé is Head Key Account Management and a member of the management team of the North American division of Swiss Re Corporate Solutions. In 1996, he joined Swiss Re in Zurich, Switzerland, in the newly created credit risk management division. In 1998, Bouteillé moved to New York where, as U.S. Head of Credit Risk Management, he was responsible for credit risk aspects of all insurance and capital markets transactions. In 2003, he became U.S. Head of Structured Credit Underwriting, where he originated and structured credit derivatives and financial guaranty reinsurance transactions. Since 2008, Bouteillé has been working with risk managers of Fortune 500 companies to develop traditional and non-standard insurance solutions. Bouteillé holds an MS in civil engineering from ENTPE (France) and an MBA from INSEAD (France).

Diane Coogan-Pushner is Distinguished Lecturer and Director of the Graduate Program in Risk Management at Queens College, City University of New York. She began her career in financial services at the World Bank and held increasingly senior positions in finance and strategy at AT&T and PricewaterhouseCoopers. Coogan-Pushner moved to Swiss Re, and as Managing Director, originated and structured reinsurance transactions and other risk transfer solutions for insurance clients. Other credits include roles as a portfolio manager for a hedge fund and for a private equity fund both dedicated to financial services. She has served as a director for an insurer and as a member of S&P's Insurance Ratings Advisory Council, and consults to financial institutions in their asset management strategy. She received her PhD in economics from Boston University in 1992 and is a CFA charterholder.