Credit Portfolio Management

• Credit Risk within Bank Risk Management
• Building Blocks of Modern Credit Portfolio Management
• The Collateral Management Process
• Data Requirements for Building a Credit Portfolio Model
• Credit Portfolio Models
• Credit Portfolio Optimization
• Tools and Techniques to Manage a Credit Portfolio

The purpose of this course is to give you a good understanding of the processes, methods, tools and techniques for managing credit risk in a portfolio context.

We start with an overview of traditional and current definitions of credit risk together with recent regulatory initiatives. We then look at requirements for a sound ICAAP (Internal Capital Adequacy Assessment Process) within a bank and discuss how to measure the unexpected loss and the Economic Capital.

We take a closer look at the individual building blocks of a modern credit portfolio management process. We show how scoring models together with external and internal ratings are integrated into the process and discuss limitations and possible improvements. We then turn to collateral management, which is recognized as an important building block in the credit portfolio management process to achieve credit enhancement and risk mitigation. Whilst helping to reduce credit risk, collateral management exposes the firm to operational, legal, liquidity and price risks.

Aggregating credit risk in a portfolio context is far from being simple. We propose a new way and look at the aggregation over time represented by the rating migrating matrix. Often the data gathering process necessary for credit risk analysis presents a big challenge to most banks. We shall present state-of-the-art methodologies together with practical tips how to overcome this challenge.

We then present a number of widely used quantitative credit portfolio models and explain their advantages and disadvantages. We use the models to calculate credit VaR and economic capital for a sample portfolio.

We shall show how a credit portfolio can be optimally allocated to optimize the expected credit return on a given investment horizon.

We then present and demonstrate techniques and tools for mitigating and controlling credit risk. We show how loans should be priced using risk-adjusted pricing and explain how credit risk can be reduced through the use of loan covenants, collateral and margining arrangements. Finally, we explain how credit risk can be transferred using credit guarantees, credit derivatives and securitization.

09.00 - 09.15 Welcome and Introduction

09.15 - 12.00 Credit Risk within Bank Risk Management

• The Anatomy of Credit Risk
• Traditional and Current Definitions of Credit Risk
• Regulatory Overview
• Introduction to ICAAP
• Credit VaR
• The Use of Economic Capital as a Key driving Force for Credit Portfolio Management

Building Blocks of Modern Credit Portfolio Management – Part I

• Fundamental Business Analysis
• Financial Analysis
• Credit Scoring Models
  • Judgmental Scoring Models
  • Statistical Scoring Models
• External Rating Systems
  • Differences between Rating Agencies
  • Limitations
• Internal Rating Models
  • Requirements and Key Elements
  • Deployment
  • Verification

12.00 - 13.00 Lunch

13.00 - 16.30 Building Blocks of Modern Credit Portfolio Management – Part II

• The Collateral Management Process
  • Calculation of haircut
• Portfolio Credit Risk versus Single Credit Risk
  • Break-down of the usual Credit VaR Concept
  • Defining a new Portfolio Credit Risk Measure
• Credit Migration Analysis
• Integrating Credit Risk into total Portfolio Risk

Data Requirements for Building a Credit Portfolio Model

• 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

Friday, November 9

09.00 - 09.15 Recap

09.15 - 12.00 Credit Portfolio Models

• Anatomy of a Portfolio Credit Model
• Overview of widely used Credit Portfolio Models
  • Advantages and Disadvantages
• Uncorrelated Binomial Model
• Single Factor Gordy Model
• Factor Probit Models
• The Merton Family of Models
• Adaptive Intensity Models
• Calculating Credit VaR and the Economic Capital
• Stress Testing the Models

Credit Portfolio Optimization

• The Importance of the Investment Horizon
  • Adjusting the Credit Migration Matrix
• Mean Reversion Effects of Total Credit Portfolio Rating
• Balancing Risk Appetite and Diversification
• Stable Allocation Strategies
• Optimization of the Credit Return from a Portfolio
  • Unconditional and Conditional
  • Incorporating Rebalancing Costs
• Stress Testing the Models

12.00 - 13.00 Lunch

13.00 - 16.30 Tools and Techniques to Manage a Credit Portfolio

• General Principles for Managing Credit Risk
  • Credit Risk Organization and Procedures
  • Risk Appetite Setting and Limit Setting
• Capital Allocation and Risk Adjusted Pricing
• Using Covenants to Mitigate Risk
• Using Credit Guarantees and Insurance to Transfer Credit Risk
• Using Credit Derivatives to Transfer Credit Risk
  • Credit Default Swaps and Total Return Swaps
  • Unfunded versus funded Instruments
• Using Securitization to Transfer Credit Risk

Evaluation and Termination of the Seminar