In the last decade rating-based models have become very popular in credit risk management. These systems use the rating of a company as the decisive variable to evaluate the default risk of a bond or loan. The popularity is due to the straightforwardness of the approach, and to the upcoming new capital accord (Basel II), which allows banks to base their capital requirements on internal as well as external rating systems.
Some people distinguish between savings and investments, where savings are
monies placed in relatively risk-free accounts with modest rewards, and where
investments involve more risk and the potential for greater rewards. In this
book we do not distinguish between these ideas. We treat them both under
the umbrella of investing.
Our approach is motivated by the statistical ﬁnding that the market value of ﬁxed
income instruments exhibit a low-dimensional factor structure. Indeed, a large literature
has documented that the prices of many types of bonds comove strongly, and that these
common movements are summarized by a small number of factors. It follows that for any
ﬁxed income position, there is a portfolio in a few bonds that approximately replicates
how the value of the position changes with innovations to the factors.
Chapter 20 - Managing credit risk on the balance sheet. This chapter provided an in-depth look at the measurement and on-balance-sheet management of credit risks. The chapter then discussed the role of credit analysis and how it differs across different types of loans, especially mortgage loans, individual loans, mid-market corporate loans, and large corporate loans.
Our supervisory framework was not equipped to handle a crisis of this magnitude. To be
sure, most of the largest, most interconnected, and most highly leveraged financial firms
in the country were subject to some form of supervision and regulation by a federal
government agency. But those forms of supervision and regulation proved inadequate
First, capital and liquidity requirements were simply too low.
Margin Loans. A national bank may use an alternative approach to calculate its capital
requirement for certain eligible bank margin loans to customers for the purpose of buying
or carrying margin stock.
Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States. With ofﬁces in North America, Europe, Australia, and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding. The Wiley Finance series contains books written speciﬁcally for ﬁnance and investment professionals as well as sophisticated individual investors and their ﬁnancial advisors.
In recent years, enormous strides have been made in the art and science of
credit risk measurement and management. Much of the energy in this area
has resulted from dissatisfaction with traditional approaches to credit risk
measurement and with the current Bank for International Settlements (BIS)
The immediate reason for the creation of this book has been the advent of Basel II.
This has forced many institutions with loan portfolios into building risk models, and,
as a consequence, a need has arisen to have these models validated both internally and
externally. What is surprising is that there is very little written that could guide consultants
in carrying out these validations. This book aims to fill that gap.
Our goal is to study a broad sample of countries. We gather reliable data for 55 nations and measure
the size of each country’s mutual fund industry relative to the country’s assets in “primary” domestic
securities (which includes equities, bonds, and bank loans) that are available to prospective investors. For
completeness, we also report the size of national fund industry assets relative to the country’s GDP and
population. We study the industry as a whole, and equity and bond funds separately, because certain
hypotheses apply only to one of the two subsectors. ...
Sectoral differences in core business activities and risk exposures are well reflected in the
balance sheets typical of firms within each sector. In order to illustrate such differences,
stylised balance sheets for institutions from each sector are presented in Annex 2 of the
report for explanatory purposes. These stylised balance sheets suggest the following broad
The majority of a bank’s assets typically consist of loans and other credit exposures, while
the majority of liabilities consist of deposits payable on demand and other short-term
The LIBOR is the London Interbank Offered Rate, which is used as a reference rate in loan
transactions between banks. The LIBOR floor, introduced in recent years to help enhance
bank loan yields in extremely low interest rate environments, is around 1%–2% (note that
until LIBOR reaches the “floor” level, bank loan returns do not increase with rising rates).
The credit spread is the market-determined spread paid to the investor for taking on the
credit risk (historically the normal range has been 3%–8%, depending on the riskiness of a
Generally speaking, the better your credit, the lower the cost of obtaining that
credit, usually in the form of interest rates and fees. That means, you’ll have more
available for savings and spending. Lenders will have more conﬁdence in your
ability and commitment to repay the loan on time and in full.
Conversely, if your credit history is not strong, you’ll probably pay higher interest
rates and fees and have less money available for savings and spending. You could
end up being short on money and playing “catch-up,” juggling between payments
on several bills.
Even though the Committee is not currently proposing mandatory capital charges
specifically for interest rate risk in the banking book, all banks must have enough capital to
support the risks they incur, including those arising from interest rate risk. If supervisors
determine that a bank has insufficient capital to support its interest rate risk, they must
require either a reduction in the risk or an increase in the capital held to support it, or a
combination of both.
For certain commodities, such as wheat and cotton, the farmers can get Government nonrecourse
loans. The farmers can redeem the loans and sell when prices are good. Or they may permit the
Government to take title to the commodity at the loan-maturity date; then the farmers have
received the benefit of the full loan value. The Government assumes all market price risk below
the loan value.
Another device is to sell products for later delivery. A wheat miller might sell flour to bakeries
for later delivery at the price prevailing when he...
Government incentives and guarantees can then also be used – from support for research and
development (R&D) - which affects operational efficiency- to investment incentives (capital grants, loan
guarantees and low-interest rate loans), taxes (accelerated depreciation, tax credits, tax exemptions and
rebates), and price-based policies at the output stage (which affect revenue streams - e.g. feed-in tariffs), or
policies which target the cost of investment in capital by hedging or mitigating risk.
We approximate credit risk developments at the bank level by considering non-
performing loans of each institution and rating changes at the individual security level.
Importantly, our database allows us to identify not only the rating of these securities at the time
of origination but also their evolution over time. We also analyze to what extent housing prices,
securitization activity and lending may have asymmetric effects across institutions and
geographically (at the regional level) by identifying the role of each of these factors.
The loans discussed in this paper are only some of the many forms of credit available to
consumers in the Philippines, including consumer loans provided by informal institutions,
social security agencies, cooperatives, employee associations and non-banks. However, we
are unable to discuss these other forms of consumer credit in this paper due to a serious
dearth of data. In this regard, the BSP continues to lobby for the establishment of a central
credit information system so as to improve discipline in the credit markets.
The credit quality of a bond depends on the issuer’s ability to pay
interest on the bond and, ultimately, to repay the principal upon
maturity. Independent bond-rating agencies evaluate the financial
health of bond issuers and issue alphabetical credit-quality ratings.
Usually a lower credit rating means that the issuer must pay
higher interest to offset the higher risk that principal and interest
won’t be repaid on time. Figure 2 on page 10 describes the ratings
used by Moody’s Investors Service, Inc., and Standard & Poor’s