A two-day course on how to model and manage credit portfolios within an economic capital framework
The purpose of this course is to give you a good and practical understanding of how credit portfolios are modelled and managed in the context of the Basel III and economic capital frameworks.
We start with a quick review of important concepts of credit risk. We explain the differences between default and credit migration risk, and we briefly discuss how these types of risk may affect different market participants.
We then turn to look at ways for quantifying credit risk in a portfolio context. We present and discuss alternative modelling approaches, including structural models, reduced form models, and rating migration models. We also thoroughly explain the use of copula functions to model default correlations and we demonstrate how changing correlation assumptions may affect the loss distribution.
Further, we explain how portfolio credit risk can be mitigated through diversification, collateralization and risk transfer using credit derivatives.
Finally, we discuss how these how credit portfolio modelling can be used within firm-wide risk management and regulatory and economic capital process. We explain how regulatory and economic capital for credit risk can be assessed, stress tested, allocated and used for risk-adjusted pricing and performance measurement. We also demonstrate how credit portfolios can be constructed to optimize the trade-off between return and risk.