Credit Portfolio Management

2 days
Prague, NH Hotel Prague
  • Credit Risk within Bank Risk Management
  • Measuring Portfolio Risk
  • Credit Portfolio Models
  • Credit Portfolio Optimization
  • Regulatory and Economic Capital Allocation
  • Stress Testing of Credit Portfolios
  • Tools and Techniques to Manage a Credit Portfolio
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.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Credit Risk within Bank Risk Management

  • The Anatomy of Credit Risk
  • Types and Categories of Credit Risk
  • Key Drivers of Credit Risk
  • Strategies for Managing Credit Risks in Banks

Measuring Portfolio Credit Risk

  • Portfolio Credit Risk vs. Single Credit Risk
  • Credit Risk Loss Distributions: Expected vs. Unexpected Losses
  • Expected Loss Parameters
    • Probability of default, loss given default, exposure at default
  • Economic Capital Parameters
    • Correlations, concentration, maturity and migration matrix
  • Portfolio Loss Distribution
    • Key statistics, distribution types, impact of parameters
  • Credit Migration Analysis
  • Practical Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Credit Portfolio Models

  • Anatomy of a Portfolio Credit Model
  • Alternative modelling approaches
    • Default models
    • Mark to market / multi-state models
    • Structural and reduced form models
    • Conditional and unconditional models.
  • Widely Used Credit Portfolio Models and their Applications
    • The Merton model
    • The KMV model
    • Rating migration models (CreditMetrics)
    • Advantages/disadvantages of each model
    • Practical examples of model applications
  • Using Copula Functions To Model Default Correlation
    • Gaussian copulas
    • T-copulas
    • Example: using a Gaussian copula to generate loss distributions of tranched credit portfolios
  • Small Exercises

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Mitigating Portfolio Credit Risk

  • Effective Diversification of Credit Portfolios
  • Setting and Managing Exposure Limits
    • Limits based upon absolute exposure
    • Limits based upon marginal risk
  • Using Collateral
    • Establishment of collateral relationship
    • Types of collateral
    • Collateral management
  • Using Credit Derivatives to Manage Portfolio Risk
    • Reducing portfolio concentration risk with credit defaults swaps
    • Hedging correlation risk with tranched index CDSí and structured credit products
  • Effective Management of CDS Counterparty Risk
  • Practical Examples and Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Capital Allocation and Stress Testing

  • Regulatory Framework
    • Basel III Standardised and IRB Approaches
    • Capturing Credit Portfolio Risk Using and ASRF Model
    • Pillar II Requirements - the ICAAP
  • Economic Capital Framework
    • Assessing economic capital for credit risk
    • Internal allocation of economic capital
    • Risk-adjusted loan pricing and performance measurement
  • Stress Testing Credit Risk Models
  • Scenario analysis
  • Macroeconomic stress tests
  • Constructing Optimal Credit Portfolios
    • Balancing risk appetite and diversification
    • Optimization of the credit return from a portfolio
  • Practical Examples and Exercises

Evaluation and Termination of the Seminar

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