credit risk mgmt
TRANSCRIPT
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CREDIT RISK MANAGEMENT
THE COMMODITISATION OF CREDIT RISKTRENDS IN CREDIT RISK MANAGEMENT
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KEY PROPOSITION
• THE ADVENT OF ACTIVE AND LIQUID CREDIT TRADING WILL REQUIRE– COMPLETE RE-ENGINEERING OF THE CREDIT
FUNCTION & PROCESS– ALTER THE NATURE OF BANKING
FUNDAMENTALLY
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AGENDA
• KEY DRIVERS OF CHANGE• CREDIT RISK MANAGEMENT PARADIGMS
– CLASSICAL– MODERN
• CREDIT RISK MANAGEMENT ARCHITECTURE• IMPLICATIONS FOR FINANCIAL SERVICES
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KEY DRIVERS OF CHANGE
• KEY FEATURE OF CREDIT RISK– CENTRAL TO ALL FINANCIAL TRANSACTIONS
• TRADITIONAL VIEW OF CREDIT– ILLIQUID
• CURRENT VIEW OF CREDIT– LIQUID & TRADEABLE
• SHIFT FROM STATIC MANAGEMENT OF CREDIT TO DYNAMIC MANAGEMENT OF CREDIT RISK
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KEY DRIVERS OF CHANGE
• SHAREHOLDER VALUE ISSUES– RETURN ON CREDIT CAPITAL– OPTIMISATION OF RETURN ON CREDIT
CAPITAL• CHANGES IN FINANCIAL SERVICES
– VALUE CHAIN IN FINANCIAL SERVICES– TREND TO UNBUNDLING THE
MICROSTRUCTURE
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PRODUCT MANUFACTURE
ORIGINATION/ DISTRIBUTION
RISK
PROCESSING/ ADMINISTRATION
CAPITAL MANAGEMENT
PRODUCT/ KNOWLEDGE
MANAGEMENT
TECHNOLOGY MANAGEMENT
PRODUCT FOCUS CLIENT FOCUS
RISK MANAGEMENT
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KEY DRIVERS OF CHANGE
• CREDIT RISK MANAGEMENT PERFORMANCE– CONTROL FAILURES– QUANTIFICATION OF CREDIT RISK– INTERACTION OF MARKET AND CREDIT RISK
• CREDIT RISK PRICING– INABILITY TO PRICE CREDITR ISK
“CORRECTLY”– INCONSISTENCY OF PRICING
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KEY DRIVERS OF CHANGE
• COSTS OF CREDIT RISK MANAGEMENT INFRASTRUCTURE
• LIQUEFACTION OF CREDIT RISK– SYNDICATION & ASSET SALES– SECURITISATION– CREDIT DERIVATIVES & CREDIT LINKED
NOTES
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• DEVELOPMENTS IN CREDIT ENHANCEMENT TECHNIQUES– BI-LATERAL– MULTILATERAL
• ADVANCES IN CREDIT/ DEFAULT RISK THEORY• INFRASTRUCTURE DEVELOPMENTS
– SYSTEMS CAPABILITIES
KEY DRIVERS OF CHANGE
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KEY DRIVERS OF CHANGE
• CHANGE IN REGULATORY FRAMEWORK– SHIFT TO CAPITAL BASED REGULATION– REGULATORY ARBITRAGE– (POSSIBILITY) OF MODEL BASED CREDIT RISK
CAPITAL
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KEY DRIVERS OF CHANGE
• KEY NEAR TERM FACTORS– CREDIT CAPITAL MANAGEMENT– CREDIT PRICING– CREDIT RISK MANAGEMENT– REGULATORY DEVELOPMENTS– SHIFTS IN BANKING STRATEGY
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CREDIT RISK PARADIGMS
• TYPES– CLASSICAL– MODERN
• KEY ISSUE– APPLICABILITY TO DIFFERENT MARKET
SEGMENTS
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CREDIT RISK BY MARKET SEGMENT
• SEGMENTS– RETAIL– MID-MARKET– WHOLESALE/ CORPORATES
• DIMENSIONS– RISK– PRICING– CREDIT METHODOLOGY– LIQUIDITY AND TRADEABILITY
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SIZE OF INDIVIDUAL EXPOSUREHIGHLOW
NU
MB
ER
OF
CO
UN
TE
RPA
RT
IES
SMALL
LARGE
RETAIL
MID-MARKET
WHOLESALE
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CLASSICAL PARADIGM
• CONCEPT– ASSESS RISK AND MATCH WITH CAPITAL– RISK MANAGEMENT TECHNIQUES
• DIVERSIFICATION• COLLATERAL
• SCHEMATIC
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CREDIT REQUEST
CREDIT LIMIT
CREDIT FUNCTION
ORIGINATION CLIENT
TRANSACTION
•CREDIT ASSESSMENT
•MONITORING CREDIT LIMIT & CREDIT ADMINISTRATION
•TRANSACTION ORIGINATION
•PREPARATION OF CREDIT REQUEST
•PRICING/ STRUCTURING
•ADMINISTRATION
CREDIT RISK MANAGEMENT
•CAPITAL
•PROVISIONING
•RISK SYNDICATION
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CLASSICAL PARADIGM
• KEY ELEMENTS• CREDIT ANALYSIS AND ASSESSMENT PROCESS
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IMPLICATIONS OF CLASSICAL PARADIGM
• CREDIT RISK ASSUMPTION• CREDIT PRICING• CREDIT CAPITAL MANAGEMENT• CREDIT RISK FOCUS• CHANGES IN CREDIT QUALITY• PERFORMANCE ATTRIBUTION OF ORIGINATORS• PERFORMANCE OF CREDIT FUNCTION
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MODERN PARADIGM
• CONCEPT– CREDIT RISK AS A SEPARATE TRADEABLE
ASSET CLASS– RISK MANAGED DYNAMICALLY THROUGH
HEDGING AND TRADING TOOLS• SCHEMATIC
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ORIGINATION
CREDIT FUNCTION
CREDIT PORTFOLIO
CREDIT TRADING
CAPITAL MARKET
CREDIT CAPITAL
CLIENT
TRANSACTION
CREDIT REQUEST
CREDIT LIMIT & CREDIT CHARGE
•TRANSACTION ORIGINATION
•STRUCTURING/ PRICING
•ADMINISTRATION
•SYNDICATION/ ASSET SALES
•SECURITISATION
•CREDIT DERIVATIVES
•CREDIT ASSESSMENT
•CREDIT PORTFOLIO
ANALYSIS
•CREDIT CAPITAL
MANAGEMENT
CREDIT PORTFOLIO MANAGEMENT & POSITIONING
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TRANSACTION
RETURN
TRANSACTION CREDIT RISK
ORIGINATOR
INTERNAL CREDIT DEFAULT SWAP
CREDIT RISK
CREDIT RISK CHARGE
CREDIT PORTFOLIO
CREDIT CAPITAL
CREDIT HEDGES
CREDIT RISK TRADED & HEDGED
CREDIT RISK ASSUMED & MANAGED
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MODERN PARADIGM
• KEY ELEMENTS• CREDIT ANALYSIS AND ASSESSMENT PROCESS
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IMPLICATIONS OF MODERN PARADIGM
• CREDIT RISK ASSUMPTION• CREDIT PRICING• CREDIT CAPITAL MANAGEMENT• CREDIT RISK FOCUS• CHANGES IN CREDIT QUALITY• PERFORMANCE ATTRIBUTION OF ORIGINATORS• PERFORMANCE OF CREDIT FUNCTION
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IMPLICATIONS OF MODERN PARADIGM
• CLIENT MANAGEMENT– CORE VERSUS NON CORE CLIENTS– HOME VERSUS FOREIGN MARKETS
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CREDIT RISK MANAGEMENT ARCHITECTURE
• CONCEPT– RISK MANAGEMENT SYSTEMS COMPONENTS– INFORMATION SYSTEMS
• SCHEMATICS
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C R E D IT R IS K M A N A G E M E N T A R C H ITE C TU R E
C R E D IT A N A L Y S IS
C R E D IT E N H A N C E M E N T C R E D IT A D M IN IS TR A TIO N C R E D IT S Y S TE M S /IT IN F R A S TR U C TU R E
C R E D IT C A P ITA L M A N A G E M E N TE C O N O M IC C A P ITA L
R E G U L A TO R Y C A P ITA L
C R E D IT P O R TF O L IO M O D E L L IN G /C R E D IT P R IC IN G
C R E D IT TR A D IN G
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CREDIT DATA
TRANSACTION DATA
CREDIT ANALYSIS
RISK DATA CREDIT MODELS
CREDIT ENHANCEMENT
REPORTING
CREDIT CAPITAL
MANAGEMENT
LIMIT ADMINISTRATION
OBLIGOR/ COUNTERPARTY
DATA
RATING MODELS
•INTERNAL
•EXTERNAL
•CREDIT EXPOSURE - STATIC & DYNAMIC (PFCE MODEL)
•DEFAULT PROBABILITY/ RATINGS MIGRATION
•RECOVERY RATES
•DEFAULT CORRELATIONS
•PORTFOLIO MODELS
•PRICING MODELS
•COLLATERAL
•NETTING
•CLEARING HOUSE
•ECONOMIC CAPITAL
•REGULATORY CAPITAL
•PROVISIONING•SETTLEMENT LIMITS
•RISK LIMITS
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IMPLICATIONS FOR FINANCIAL SERVICES
• TYPES– MICRO(OPERATIONAL)
• REDEFINITION OF CREDIT PROCESS WITHIN ORGANISATIONS
– MACRO(STRATEGIC)• REDEFINITION OF BUSINESS FOCUS
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OPERATIONAL CHANGES
• RE-ENGINEERING THE CREDIT PROCESS• ALTERATION OF CREDIT RISK ARCHITECTURE/
INFRASTRUCTURE
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STRATEGIC CHANGES
• THEME– SHIFT FOCUS OF BANKS FROM HOLDER OF
RISK TO ORIGINATORS AND DISTRIBUTORS OF RISK
• MODELS OF BANKING PRACTICE
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BORROWER BANK DEPOSITOR
MODEL 1 - CLASSICAL BANKING MODEL
LOAN TRANSACTION DEPOSIT TRANSACTION
BANK ORIGINATES, FUNDS, ADMINISTERS AND RETAINS CREDIT RISK OF BORROWER
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BORROWER BANK INVESTOR
MODEL 2 - INVESTMENT BANKING/ SECURITIES MODEL
ISSUE OF SECURITIES DISTRIBUTION OF SECURITIES
BANK ORIGINATES TRANSACTION AND MAY ADMINISTER IT AS PAYMENT AGENT. FUNDING AND CREDIT RISK OF BORROWER IS TRANSFERRED TO INVESTOR. PRIMARY RISK IS UNDERWRITING
WHICH IS SYNDICATED TO REDUCE RISK LEVEL,
OTHER BANKS
UNDERWRITING OF PLACEMENT OF SECURITIES AND SYNDICATION OF UNDERWRITING RISK
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BORROWER BANK INVESTOR
MODEL 3 - SECURITISATION MODEL
LOAN TRANSACTION SALE OF LOAN BACKED SECURITIES
BANK ORIGINATES AND ADMINISTERS THE LOAN. BANK SELLS LOAN TO SECURITISATION VEHICLE WHICH ISSUES LOAN ASSET BACKED SECURTIES. FUNDING
AND CREDIT RISK OF BORROWER IS BORNE BY INVESTOR. BANK RISK IS CONFINED TO CREDIT RISK PRE-SALE TO SECURITISATION VEHICLE AND ANY UNDERWRITING
RISK ON THE PLACEMENT OF THE LOAN ASSET BACKED SECURITIES
SECURITISATION VEHICLE
SALE OF LOAN TO SECURITISATION VEHICLE
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BORROWER BANK INVESTOR/ OTHER BANK
MODEL 4 - ECONOMIC RISK TRANSFER MODEL
LOAN TRANSACTION CREDIT DEFAULT SWAP OR CREDIT LINKED NOTE
BANK ORIGINATES, FUNDS AND ADMINISTERS THE LOAN. CREDIT RISK OF BORROWER IS TRANSFERRED TO INVESTORS OR OTHER BANKS. BANK CREDIT RISK IS PRE ECONOMIC HEDGE ONLY. WHERE A CREDIT LINKED
NOTE IS ISSUED THE INVESTOR/ OTHER BANK ALSO PROVIDES FUNDING.
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KEY CHALLENGES
• CREDIT RISK MODELLING PROBLEMS• DEVELOPMENT OF CREDIT TRADING• CREDIT ENHANCEMENT PROBLEMS• CHANGES IN CREDIT INFRASTRUCTURE• CHANGE MANAGEMENT
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CONCLUSIONS
• THE ADVENT OF ACTIVE AND LIQUID CREDIT TRADING WILL REQUIRE– COMPLETE RE-ENGINEERING OF THE CREDIT
FUNCTION & PROCESS– ALTER THE NATURE OF BANKING
FUNDAMENTALLY
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