Credit and Counterparty Risk Management

3 days
Prague, NH Hotel Prague
  • Regulatory Initiatives
  • Fundamental Credit Analysis
  • Credit Scoring Models
  • External and Internal Rating Systems
  • Measuring and Managing Counterparty Risk
  • Monitoring and Controlling Credit Risk
  • Using Covenants, Netting and Collateral
The purpose of this course is to give you a good understanding of methods, tools and techniques for measuring, mitigating and controlling credit and counterparty risk.

We start with an introduction to credit risk and credit risk management and an overview of regulatory initiatives towards strengthening of credit management practices in financial institutions.

We then explain how credit risk can be quantified using "traditional" and more advanced techniques. First, we explain how credit risk can be identified and measured by looking at accounting data combined with an analysis of financial and non-financial risks. We present and explain important ratios, including "coverage", "profitability" and "leverage" ratios. We also demonstrate how cash flow projections are used to gauge a borrower's debt servicing capability. Further, we explain how ratios, cash flows etc. can be analyzed statistically to obtain credit scorings for corporate as well as sovereign debt.

On day two, we first look at rating systems. We explain the methodologies of rating institutions and we discuss how their ratings should be interpreted and used under the Basel standardized approach. Further, we give a thorough introduction to internal rating systems. We explain how such systems can be built, calibrated and implemented, and we demonstrate how they can be used for quantifying pooled PDs and recovery rates. We also explain and demonstrate techniques for validating internal rating system.

Further, we explain and demonstrate how to measure counterparty risk in derivates and securities financing transactions using a simple add-on method as well as a more advanced method of simulating potential exposure profiles. We also explain how to assess CVA risk and how to calculate the capital charge for this type of risk.

On day three, we present and demonstrate techniques and tools for mitigating and controlling credit risk. We start with an overview of "general" principles for sound credit management, illustrated by a practical case.

We explain and demonstrate how credit and counterparty risk can be mitigated through the use of loan covenants, netting and collateral. Finally, we explain how corporate and sovereign credit risk can be transferred using credit guarantees, credit derivatives and securitization.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 A Framework for Credit Risk Management

  • Credit Risk: The Post-Crisis Landscape
  • The Anatomy of Credit Risk
    • Types of credit risks
    • Sovereign risk vs. corporate credit risk
    • Building blocks in credit risk
  • Regulatory Initiatives - Basel III

Fundamental Credit Analysis

  • Fundamental Business Analysis
    • Macroeconomic environment
    • Industry characteristics
    • Competitive position
  • Financial Analysis
    • Financial characteristics and policy
    • Profitability and liquidity
    • Coverage ratios
    • Capital structure and leverage
    • Cash flows and debt servicing capacity
    • Financial shenanigans
  • Small Exercises

12.00 - 13.00 Lunch

13.00 - 16.30 Fundamental Credit Analysis (Continued)

  • Fundamental Credit Analysis of Retail Clients
    • Credit history
    • Job situation, income and wealth
    • Age, health and other biometric factors

Credit Scoring Models

  • Types of Credit Scoring Models
    • Judgmental scoring models
    • Statistical scoring models
  • Example: Altman’ s Z-Score
  • Using Bayesian Methods for Improving Credit Scoring Models
  • Credit Scoring of Retail Clients
  • Credit Scoring of Sovereign Debt
  • Credit Scoring: Practical Exercise

Day Two

09.00 - 09.15 Recap

09.15 - 12.00 Rating Systems

  • External Rating Systems
    • Rating institutions and their methodologies
    • Sovereign vs. corporate ratings
    • Ratings and their interpretations
    • Case study: using external ratings for calculating risk weighted assets
  • Internal Rating Models
    • The Basel IRB Risk Weight Function
    • Building, calibrating and implementing and internal rating system
    • Quantifying stressed PDs using historical default experience , statistical models and external mapping
    • Benchmarking and migration of PDs
    • Calculating loss given default (LGD)
    • Validating internal rating systems
    • Exercise
  • Case study: Using outputs from internal rating system and to calculate capital charge

12.00 - 13.00 Lunch

13.00 - 16.30 Measuring Counterparty Risk

  • Counterparty Risk – General Introduction and Overview
    • Lending risk vs. counterparty risk
    • Examples of transactions that expose parties to counterparty risk
  • Exposures Definitions
    • Current exposure
    • Potential future exposure
  • Measuring CP Risk using the Add-On Method
  • Measuring CP Risk Using the IMM
    • Modelling Potential Future Exposure
    • Calculating the EAD and the Capital Charge
  • Calculating the CVA Capital Charge
  • Taking Wrong Way Risk into Account
  • Exercises

Day Three

09.00 - 09.15 Recap

09.15 - 12.00 Managing Credit and Counterparty Risk

  • General Principles for Managing Credit Risk
    • Appropriate credit risk environment
    • Sound credit granting process
    • Credit administration, measurement and monitoring
    • Adequate controls over credit risk
    • The role of supervisors
  • Case Study:
    • Credit risk organization and procedures at large bank
  • Using Covenants to Mitigate Risk
    • Affirmative covenants
    • Negative covenants
  • Managing Counterparty Risk
    • Active counterparty credit monitoring
    • Trade approvals against credit line limits
    • Early termination of deals
    • Netting
    • Collateral management
  • Small Exercise

12.00 - 13.00 Lunch

13.00 - 16.30 Managing Credit Risk (Continued)

  • Using Credit Guarantees and Insurance to Transfer Credit Risk
  • Using Credit Derivatives to Transfer Credit Risk
    • Credit default swaps
    • Total return swaps
    • Pricing credit derivatives
    • Practical and legal issues
  • Practical Case Studies
    • Using CDSs to hedge corporate and sovereign credit risk
  • Using Securitization to Transfer Credit Risk
  • Practical Case Studies and Exercises
  • Outlook: Future Challenges in Credit Risk Management

Evaluation and Termination of the Seminar

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