Sie sind auf Seite 1von 24

Credit risk management Module -4 Session No.

8 to 12

1/8/2012

Unexpected Vs Expected losses


       

Credit produce Income as well as Risk Expected Vs Unexpected losses Expected loss is statistical tool which will occur on an average Unexpected loss is deviation from average Default risk-Probability of default riskExposure risk-Exposure at default riskRecovery risk-Loss given default riskEL=PDXEADXLGD
2

1/8/2012

Credit risk-examples riskDirect lending- repayment is not made lending Non fund- funds not forthcoming on fundcrystallization of LC/BG  Series of payment due from bonds are not forthcoming on due dates  Security trading- settlement not tradingforthcoming  Cross border exposure- currency exposuremovement not taking place

1/8/2012 3

Defining credit risk


Bank borrower or counter party will fail to meet its obligation in accordance with the agreed terms  Also include credit rating down grades of borrowers


1/8/2012

Credit risk model




Basic model
NPA written off on the bank s profit PBT/NPA Will wipe out bank profit Margin of safety

1/8/2012

Credit risk model




Credit scoring model


Traditionally system of loan analysis Credit score model Probability of default (PD) to expected loss (EL)

Empirical techniques- historical default techniquesrate  Market based models- Counter party modelsmarket data to infer likelihood of default

1/8/2012 6

Risk Management


Bank need to manage


Risk in Individual Credit Credit risk in entire portfolio Other source of credit risk such as guarantees, acceptances, forex business etc

Credit Rating  Recovery system  Credit Risk transfer



1/8/2012 7

Risk in individual credit Seven Cs of credit decision


Character  Capacity  Capital  Creditworthiness  Collaterals  Covenants/conditions  Credit Scoring or Risk Ratings system

1/8/2012 8

Credit risk in the portfolio


Upside and down side risk in investment but only down side risk in loans  Diversification across industry, geography, sectors  Concentration risk


Exposure norms for sectors Exposure norms for individuals Exposure norms for group
1/8/2012 9

Credit risk from other sources




Bank may face credit risk other than loan and advances say
Acceptances (letter of credit) Inter bank transactions Trade financing Foreign exchange transactions Future, swaps, options etc.

1/8/2012

10

Basel guidelines for Credit risk management


Establishing a credit risk environment  Sound credit granting process including internal credit rating  Maintaining a credit administration, measurement and monitoring process  Ensuring adequate control on credit risk


1/8/2012

11

Credit Rating
Bench mark criterion for investors, borrowers, banks, financial institutions  Ratings helps to compare performance  Used as a decision making tool  Trend Started in 1970- two international 1970agency Standard & Poor and Moody s Investor service  CRICIL, ICRA, FITCH etc are rating agencies in India

1/8/2012 12

Credit Rating


  

Information to investors-Investors risk investorsperception to Actual Credit Rating- investor may Ratinginvest or hold the security Bank use to support lending decision or staying invested or charging rate of interest Issuers also see benefits and pay for it RegulatorsRegulators- capital market investment and bank to rate borrower and risk weight of assets for capital adequacy
13

1/8/2012

Rating system in banks


Credit appraisal key skill is to identify risk, assess their severity and ensure they are mitigated so that lender is comfortable  Banks rate their customers both internally and externally  Basel II has made the external rating mandatory of loan above cut off under standard approach

1/8/2012 14

Recovery


Loan work out


Restructuring Rehabilitation Compromise Scaling down of debt

Going to court for recovery

1/8/2012

15

Credit risk transfer


 

Insurance is way of transferring risk to other party ( insurer) Objectives


Liquidity management Lower interest rate risk Profitability enhancement including arbitrage opportunity Mitigation of Credit risk Capital relief Balance sheet optimization

1/8/2012

16

Credit risk transfer




Loan syndication Loan participation Loan securitization Derivatives


17

1/8/2012

Credit risk transfer




Loan Syndication
Sharing of loan with other banks Earning fee based income through syndication

Loan Participation
IBPC with recourse-remain in balance sheet recourseIBPC without recourse Move out of balance sheet

1/8/2012

18

Credit risk transfer




Loan Securitization
Process of selling loans Homogeneous pool of loan assets that generates a predictable stream of future cash flow Remove assets from bank s book

Process
Originators to sell loan to a SPV (special purpose vehicle) Converted into securities - ABS (assets based securities) Sold to investors without recourse Interest of investor is saved through over collateralization, senior & subordinated structure , credit enhancement ( backed by letter of credit)

1/8/2012

19

Credit risk transfer




Credit derivatives
Way to insure credit losses Pay off linked to credit related event such as borrower default, credit rating down grades, value of security going down Bank transferring credit risk is called protection buyer and counter party (ready to bear credit risk) is called protection seller Are typically unfunded- protection seller need unfundednot invest money upfront

1/8/2012

20

Credit risk transfer




Credit derivatives
Typical products are
 CDO (credit default options)  CDS (credit default swaps)

1/8/2012

21

Credit risk transfer




 

CLOCLO- Originating bank transfer pool of loans, the bonds that emerge are called collateralized loan transfer CBOCBO- Originating bank transfer a pool of bonds, securitize them, these are called collateralized bond transfer Generic name of CLO and CBO is CREDIT DEFAULT OPTION Typical securitization purpose is liquidity & interest rate risk whereas in CLO/CBO are meant for credit risk transfer, capital relief, arbitrage, balance sheet optimization
22

1/8/2012

Credit risk transfer




Credit Defaults Swaps


Priced on the bases of Expected Losses (EL) Bank A agrees to pay Bank B fee for being protection seller Bank B agrees to pay Bank A pre-determined value prebased amount ( as % value of the assets) if default occurs Settlement is done either by cash or physical settlement In physical settlement protection seller will get possession of the physical assets

1/8/2012

23

Why do the bank use credit derivatives?


     

Easy and cost effective means to hedge portfolio risk Permit substantial flexibility and increase profitability efficiency Hedge against interest rate risk Efficient than loan sales Bank action is not visible to borrowers and market, hence remaining secret Loan sale call for substantial information and bank to incur more cost and obligations
24

1/8/2012

Das könnte Ihnen auch gefallen