Credit Risk Management and Basel II
With the entire financial sector across the globe working on the implementation of the 2004 Basel II Accord in some form and intensity, there is much work to be done at bank level. Credit Risk Management gives you the means to put in place the credit risk measurement and management framework, policies, procedures and practices that are needed.
As a unique implementation guide covering the entire spectrum of credit risk management, this book will assist you with your credit risk policy and help you to facilitate the establishment of risk processes and procedures.
Having assessed the vast amount of existing literature on this subject Bhatia found the bulk of it to be deficient in many areas, this book fills in the gaps for you by:
• Approaching explanations from a non- mathematical perspective, with the spirit behind the mathematics and equations explained in an accessible manner;
• Taking a holistic approach, with an end-to-end analysis of the credit risk problem; and
• Absorbing and integrating best practices echoed by the Basel Accord.
An excellent framework for analysis and implementation is provided and this information will be beneficial for a wide range of people from risk managers and compliance officers to credit risk administration personnel, front and middle office personnel, and students of GARP or financial engineering.
Contents
Chapter 1. Introduction to Credit Risk Management
Challenge of credit risk management
What is credit risk?
Importance of credit risk measurement
Analysing credit loss
Analysing credit event
Components of credit risk
Measurement framework
Types of credit risk
Developments on the regulatory side (BIS framework)
SECTION I – RISK COMPONENTS
Chapter 2. Measuring Default
Defining default
Measuring PD
Estimating ex-ante PD
Transition Matrix
Whether rating really measures PD
Uses of PD
Chapter 3. Credit Scoring
Introduction
Issues in credit scoring
Uses of credit scoring
Credit scoring techniques
Discriminant analysis
Logit model
Neural networks
Search for the best method
Case studies
Chapter 4. PD Models
Building blocks for market information based models
Structural models
Reduced form models
Chapter 5. Credit Rating
Business risk assesment methodology
Assessing financial strength
Sovereign credit rating
Credit structures
A generic rating process
External rating
Internal ratings
Chapter 6. Risk Mitigation Techniques
Risk mitigation techniques
Collateral
Credit risk transfers
Securitisation
Credit derivatives
Chapter 7. Loss Given Default
Introduction
LGD under Basel II
Measurement and Estimation of LGD
Factors determining recovery rates
Business requirements for an information system for recording recovery
CREDIT RISK ARCHITECTURE
Chapter 8. Credit Risk Fortification
Introduction
Credit risk management policies, processes and standards
Accounting policies under risk management regime
Credit Risk Organisation structure
Transition from controlling risks to managing risks
Managing Credit Risk
Active portfolio management
Chapter 9. Portfolio Management
Introduction
Componentisation, approximation and substitution
Define risk components
Identify risk factors
Transforming risk factors into risk components
Generate risk components distribution
Generate portfolio loss distribution
Applications of portfolio loss distribution
Case studies
Chapter 10. Model Validation
Risk Component Measurement
Validation techniques
Model risk
Model validation techniques
Stress Testing
Best practices
Chapter 11. Software and Data
Introduction
Data collection and analysis systems
Credit rating systems
Collateral management systems
Loss given default systems
Regulatory capital estimation systems
Portfolio management systems
Data sources
Preparing Basel II
Bibliography
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