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.