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Credit Risk Management - Basel III and Beyond

Duration: 3 days
  • Measuring Credit Risk under Basel III
  • Credit Risk Rating Systems
  • Internal Ratings Based Approach
  • Modelling Default Risk and Default Correlations
  • Measuring Credit Portfolio VaR
  • Managing Credit Risk
  • Securitization and Credit Derivates
The objective of this seminar is to give you a good understanding of state-of-the-art tools and techniques for measuring and managing credit risks.

First, we discuss important market developments that have lead to and increased focus on the management of credit risk: The integration of market and credit risk, the increasing use of off-balance financing techniques and complex structures such as CDO-Squared, and the introduction of the new Basel framework for capital coverage.

Further, we look at the new Basel approaches to measuring credit risk. We briefly present the standardized approach before we give a more in-depth explanation of the “Internal Ratings Based” approach. We explain the mechanics of the approach and we demonstrate how the risk weights are derived for different exposure types. We also look at how the individual risk components such as “Probability of Default”, “Loss Given Default”, “Exposure at Default” and “Effective Maturity” are calculated for on-balance as well as for off-balance instruments. We also discuss the “minimum requirements” that must be met to qualify for the IRB approach.

We then take you far beyond the Basel guidelines to develop a powerful program for controlling your firm’s credit risk. We explain how different credit risk modelling techniques, including structural models (such as Merton, Black and Cox, Longstaff and Schwartz, Zhou and Hull and White), as well as “reduced form” models (such as Duffie and Singleton and Lando), can be used for the estimation of credit default risk and default correlations. We also explain how “Credit VaR” is calculated and used as basis for risk-adjusted pricing of loans, bonds and more complex structures.

Finally, we present and explain methods for transfer, repackaging and mitigation of credit risk, including the use of collateral, margining, securitization, credit derivates and structured credit products such as CDO’s.

Day One

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 New Challenges in Credit Risk Management

  • Why Credit Risk Has become More important
  • The Integration of Market and Credit Risk
  • Types of Credit Risks in Banking and Securities Trading
    • Issuer risk
    • Counterparty risk

Measuring Credit Risk under Basel III

  • Standardized Approach to Measuring Credit Risk
    • Using external ratings
    • Treatment of off-balance items
    • Treatment of collateral and netting
  • Practical Case Studies and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Measuring Credit Risk under Basel III (continued)

  • The Internal Ratings-Based Approach
    • Mechanics of the IRB Approach
    • Categorization of exposures
    • Foundation and advanced approaches
    • Rules for corporate, sovereign, and bank exposures
    • Rules for Retail Exposures
    • Treatment of risk mitigation (collateral, netting, credit derivatives)
  • Special Discussion: Estimation of risk components when there are no liquid stock markets or historical data
  • Practical Case Studies and Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Modelling Default Risk and Default Correlations

  • Structural Models for Default Risk
    • Modeling Credit Risk as an Option
    • Merton’s Option-Theoretical Model
    • Models with an exogenous default boundary
    • Models with an endogenous default boundary
  • Case Studies
    • Moody’s KMV
    • CreditGrades
  • Empirical Valuation of Structural Credit Risk Models
  • Calculating Inputs for the Basel IRB Approach
  • Practical Case Studies and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Modelling Default Risk and Default Correlations (continued)

  • Reduced form Models for Default Risk
  • Copula Models
    • Specifying the joint distribution of survival times from market information
    • Using copula functions in the valuation of credit derivatives
  • The Term Structure of Credit Risk
  • Measuring Credit Portfolio VaR
  • Measuring Counterparty Risk
    • Model for integrating market and credit risk
    • Taking netting arrangements into account
  • Practical Case Studies and Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Managing Credit Risk

  • Overview of Methods for Managing Credit Risk
  • Using Collateral to Manage Credit Risk
    • Calculating the “haircut”
    • Collateral management
  • Using Margining to Manage Credit Risk
  • Using Credit Derivatives to Transfer Credit Risk
    • Credit default swaps
    • Total return swaps
    • Credit options and credit spread options
    • Using “nth-to-default” swaps
    • Hedging counterparty risk with dynamic credit default swaps
  • Practical Case Studies and Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Managing Credit Risk (Continued)

  • Using Securitization to Transfer Credit Risk
    • “Traditional” asset-backed securitization
    • Securitization of bank loans and bond portfolios
    • Synthetic securitization
    • Hybrid securitization transactions
    • Legal and accounting issues in securitization
  • Practical Case Studies and Exercises

Evaluation and termination of the Seminar