CHAPTER 1
The Revolution in Credit—Capital Is the Key1
The Credit Function Is Changing1
Capital Is the Key6
Economic Capital8
Regulatory Capital11
APPENDIX TO CHAPTER 1:A Credit Portfolio Model Inside
the IRB Risk Weights21
Note23
PART ONE
The Credit Portfolio Management Process25
CHAPTER 2
Modern Portfolio Theory and Elements of the Portfolio 27
Modeling Process
Modern Portfolio Theory27
Challenges in Applying Modern Portfolio Theory to
Portfolios of Credit Assets34
Elements of the Credit Portfolio Modeling Process38
Note40
CHAPTER 3
Data Requirements and Sources for Credit
Portfolio Management41
Probabilities of Default41
Recovery and Utilization in the Event of Default92
Correlation of Defaults102
Notes107
CHAPTER 4
Credit Portfolio Models109
Structural Models110
Explicit Factor Models133
Actuarial Models141
Analytical Comparison of the Credit Portfolio Models148
Empirical Comparison of the Credit Portfolio Models153
What Models Are Financial Institutions Using?161
Notes161
APPENDIX TO CHAPTER 4:Technical Discussion of Moody’s–
KMV Portfolio ManagerMattia Filiaci 162
Default Correlation162
Facility Valuation163
Generating the Portfolio Value Distribution174
Outputs176
Notes178
PART TWO
Tools to Manage a Portfolio of Credit Assets181
CHAPTER 5
Loan Sales and Trading183
Primary Syndication Market183
Secondary Loan Market191
Note192
CHAPTER 6
Credit Derivatives with Gregory Hayt 193
Taxonomy of Credit Derivatives193
The Credit Derivatives Market201
Using Credit Derivatives to Manage a Portfolio of Credit Assets203
Pricing Credit Derivatives209
Notes224
CHAPTER 7
Securitization225
Elements of a CDO225
“Traditional” and “Synthetic” CDO Structures229
Applications of CDOs233
To What Extent and Why Are Financial Institutions
Using Securitizations?236
Regulatory Treatment237
Note240
PART THREE
Capital Attribution and Allocation241
CHAPTER 8
Capital Attribution and Allocation243
Measuring Total Economic Capital243
Attributing Capital to Business Units247
Attributing Capital to Transactions252
Performance Measures—The Necessary Precondition
to Capital Allocation258
Optimizing the Allocation of Capital267
Notes269
APPENDIX TO CHAPTER 8:Quantifying Operational Risk270
Process Approaches274
Factor Approaches274
Actuarial Approaches275
Notes276
APPENDIX
Statistics for Credit Portfolio Management Mattia Filiaci 277
Basic Statistics278
Applications of Basic Statistics306
Important Probability Distributions314
Notes324
References327
Index333 | 