1 Credit risk models to fulfill regulatory requirements and prevent the bank from failure .... IRB Advanced: modeling of PD, LGD and EAD. .... Asset Management.
Credit Risk Lecture 5 – Risk Modeling and Bank Steering Lo¨ıc BRIN
´ Ecole Nationale des Ponts et Chauss´ ees D´ epartement Ing´ enieurie Math´ ematique et Informatique (IMI) – Master II
Lo¨ıc BRIN Credit Risk - Lecture 5
1/20
Credit risk and prevention of bank failures
Banks rentability adjusted by risks
1 Credit risk models to fulfill regulatory requirements and prevent the bank from
failure 2 Reevaluating activities’ rentability taking credit risk into account
Lo¨ıc BRIN Credit Risk - Lecture 5
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Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
Provisioning and capital
Loss distribution
Assets
Liabilities
Loans and other Financial Assets
Debts
Capital Provisions
Soci´ et´ e G´ en´ erale
BNPP
CASA
JPM
GS
MS
Lo¨ıc BRIN Credit Risk - Lecture 5
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Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
Expected and Unexpected
Expected Loss and Unexpected Loss I
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Expected Loss (EL): the average loss, that is the normal cost of doing business covered by provisioning and pricing policies; Unexpected Loss (UL): potential unexpected loss for wich capital should be held.
Lo¨ıc BRIN Credit Risk - Lecture 5
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Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
Provisions
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IASB: International Accounting Standards Board; A liability on incurred losses (on Non Performing Loans, NPL); That is estimated; and adjusted when closing the case.
Under study on provisions I I
A non procyclical rule for provisioning; A forward looking, Point-In-Time, provisions on all the loans (IFRS 9). Website
Lo¨ıc BRIN Credit Risk - Lecture 5
5/20
Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
Basel Accords 1 (1988)
Basel Accords 1 (1988) I I
Basel Committee on Banking Supervision (BCBS) – 27 countries; Cook ratio and standard and simple computation of regulatory capital: on the banking book: Regulatory Capital = 8% × Weights by counterparty type × EAD on the trading book (since 1996) too.
Weight depends on the nature of the counterparty: Souvereign OECD : 0 %; Bank OECD: 20 %; Mortgages: 50 %; Other: 100 %.
Lo¨ıc BRIN Credit Risk - Lecture 5
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Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
Basel Accords 2 (2006) Basel Accords 2 (2006) I
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Pillar 1: Minimal Capital Requirements: capital for credit + market + operational risk; Pillar 2: Supervisory Review Process; Pillar 3: Enhanced Disclosure.
Lo¨ıc BRIN Credit Risk - Lecture 5
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Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
Basel Accords 3 (2014-2019) Basel Accords 3 (2014-2019) I
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Liquidity Ratios: Liquidity Coverage Ration (LCR) and Net Stable Funding Ratio (NSFR); Leverage Ratio (3 %); New definitions of capital.
Website
Lo¨ıc BRIN Credit Risk - Lecture 5
8/20
Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
The Standard Approach for Credit risk
Rating Souvereign Banks Corporates
> AA0% 20% 20%
> A20% 50% 20%
> BBB50% 100% 100%
> BB100% 100% 100%
> B100% 100% 150%
< B150% 150% 150%
NR 100% 100% 100%
Weighted Assets RWA = Weights × EAD Not just based on the nature of the relation but on its grade too.
Lo¨ıc BRIN Credit Risk - Lecture 5
9/20
Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
The Internal Rating Based – IRB
The Internal Rating-Based Approach I I
IRB Fondation: modeling of PD only; IRB Advanced: modeling of PD, LGD and EAD. RWA = f (PD, LGD, EAD)
Lo¨ıc BRIN Credit Risk - Lecture 5
10/20
Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
IRB Approach – The formula
IRB Approach – The formula Using the IRB Approach, the Risk-Weighted Assets formula is: ! ! √ Φ−1 (PD) − ρΦ−1 (0.999) − PD × MA × SF × MCR × EAD RWA = LGD × Φ √ 1−ρ I
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1+(M−2.5)×b
The Maturity Adjustment, MA = 1−1.5×b with b = (0.11852 − 0.05478 × log(PD))2 ; The Scaling Factor, SF = 1.06; The Minimal Capital Requirements, MCR = 12.5.
Lo¨ıc BRIN Credit Risk - Lecture 5
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Credit risk and prevention of bank failures
Banks rentability adjusted by risks
Credit risk models to fulfill regulatory requirements and prevent the bank from failure
IRB Approach – The correlation parameter
The correlation parameter The correlation parameter depends on the type of the countractor: Type
counterparty risk management: for internal purpose and for regulatory capital .... An airline usually protects itself against a rise in fuel prices by entering into long.
Lecture 2 â Statistical tools for scoring and default modeling. François CRENIN .... The logistic regression model can be defined the following ways: ... therefore lead to different estimations depending on the algorithm/software chosen. .... Ther
With a barrier option approach and stochastic interest rate [Brys et al., 1997];. â· Taking into account ..... Journal Of Finance. Link. Modigliani and Miller (1958).
that PD = Q(Ri < s) = Φ. ︸︷︷︸. Normal cdf ... A copula C, is a function that is used to model dependencies: â(x1, ..., xd ) .... Gumbel compulas, Student copulas, grouped t-copulas, individual t-copulas, etc.;. â· the so-called ..... Delt
Class structure and assignments Credit risk and economics Credit risk outcomes Credit risk: The basics ... Credit Risk. Lecture 1 â Introduction, reduced-form models and CDS .... Source: Aspects of Global Asset Allocation, IMF. and personal cross-c
For a given threshold l0 < LGD, compute [(L â l0)+]. ... consists in the securitization of a portfolio of mortgage loans which have the same ... Loan to value: 75 %;.
This exercise is based on the following S&P transition matrix: .... order to make the results reproducible, we set the seed of the random number generator before.
Swap: the reference is a reference pool (usually between 5 and 10 reference entities) ..... The CRM is a risk metrics that, as the IRC, captures the risks due to.
the common threshold and Ri a normal variable equal to: Ri = ÏF + 1 â Ïεi, where F and ... consists in the securitization of a portfolio of mortgage loans which have the same ... depend on the initial amount provided (1 - Loan To Value), the rat
Write the value of the debt of the firm for the debt-holders, of the shares of the firm for the shareholders, as an option on the value of the firm and with maturity the ...
Let us consider the loan portfolio of a bank made of 200 000 loans for an average amount of 100 000 EUR. ... default occurs when the value of equity is smaller that a threshold. .... Exercise 3: The subprime mortgage crisis: a model risk crisis?
year conditional on no earlier default is 3 %. 1. Estimate the ... that buys protection on A during the period starting in 3 years and ending in 7 years. We assume ...
2 Banks are financial intermediaries which fill the gap between supply and demand on money market and the risk ..... Banking services. Proprietary Trading.
Risk-Neutral Valuation: Pricing and Hedging of Finance Derivatives. N.H, Bingham and R. ... to credit risk, our goal was to introduce the basic concepts and related no- tation, rather than to ...... 3.5.3 Incomplete Accounting Data. 113 ..... high le
For details of our global editorial offices, for customer services and for ..... spelling mistakes and bad grammar to provide some invaluable suggestions. .... A lack of proper assessment of credit exposure and default probability was a key ...... In
Credit derivatives. OTC derivatives. Corporate. Retail. Basket default swaps. Contingent ... one can easily deal with a large number of names,. â« Tackle with ...
announcements, should lead to a drop in the company's bond prices. .... associated with the names in the credit portfolio, that can be either historical or market.
Jul 1, 2003 - This correlation parameter is not estimated in principle by the banks but computed ..... 16 It is easy to prove additivity in the single factor setting. ..... 20 As the for the quantile based risk measure, the expected shortfall based r
