Enterprise Risk Management and M&E for Credit Risk Guarantee Projects

Day 1

Fundamentals of Credit Risk

• The key macro and micro financial concepts behind, and drivers of, credit risk
• Measurement of credit risk and adverse outcomes
• Assessing credit risk and default probability of loan portfolios
• Key determinants for managing credit risk:
  • Probability of default (PD)
  • Exposure at default (EAD)
  • Loss given default (LGD)
• Credit migration and transition matrices
• Fundamental analysis of financial statements, key ratios, and qualitative characteristics of the balance sheet
• Off balance sheet and contingent credit risk
• Market-based approaches, bond spreads, swap rates
• Counterparty credit risk
• Credit scoring, credit risk modelling, risk profiling and assessing creditworthiness

Day 2

Credit Ratings Methodologies and Application

• Review of ratings classifications systems of the major Credit Ratings Agencies (CRAs)
• The principal credit ratings agencies – Moody’s, Standard & Poor’s, Fitch
• Overview of the ratings methodologies – issuer analysis, historical data, business cycles
• Commercial paper ratings
• Sovereign ratings – approach to developed markets and emerging markets
• Conflicts of interest - representing credit issuers but designed to protect credit purchasers
• Why did the CRAs perform so poorly in the rating of collateralized debt obligations (CDOs) and other derivatives?
• Ratings migration matrices – use by banks in determining credit risk value at risk (VaR)
• Impact of upgrades/downgrades on market perceptions of creditworthiness
• Dodd-Frank Act de-emphasis on reliance by financial firms on external ratings

Day 3

Capital Charges and Accounting Principles

• Review of the distinction between the banking book and the trading book
• Basel III attempts to address regulatory arbitrage
• Treatment of securitizations and off-balance sheet exposures
• Available for Sale issues – impacts on liquidity, high-quality liquid assets (HQLA), rigidity of balance sheets
• Detailed examination of IFRS 9 – implementation timetable, further revisions?
• Recognition of expected losses and early warning of asset impairment
• Amortized cost – held to maturity requirements
• Fair value though other comprehensive income (FVOCI)
• Fair value through profit or loss (FVPL)

Day 4

Counter-Party Credit Risk                           

• Examine the various facets of credit risk which hinge on losses sustained from the failure of an obligor to honour contractual obligations
• Distinguish the separate components of credit risk:
  • Probability of default by obligor – how reliably can it be estimated?
  • Probability of downgrade or widening credit spreads of counterparty
  • Recovery rate – what percentage of obligation can be recovered after default?
  • Credit exposure – estimating loss magnitude about capital buffers
• Determination of a credit default event, ISDA Master Agreement, Credit Support Annex
• Understand the concepts of credit rating and scoring and critically examine how useful, such techniques are for determining the actual risk of default.
• New components in the Basel III framework for addressing issues related to default and deterioration of the credit quality of counterparties
• Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)
• Explanation of key concepts of Expected Exposure (EE), Expected Positive Exposure (EPE), Wrong Way Risk (WWR)

Day 5

Measuring Credit Risk and Techniques for Credit Risk Modelling

• Credit Metrics, credit scoring and credit rating systems
• Quantitative modelling of credit risk using stochastic processes
• Estimating probability of default – KMV Model, distance to default techniques
• Explain how debt and equity can be understood as options on the firm
• Techniques for modelling default risk of CDO’s, CMO’s and other structured vehicles
• Lessons from SIVs and another off-balance sheet financing on credit risk management
• Adapting VaR measures to include a metric for default value at risk
• Credit Migration matrices - scaling over different time frames
• Integrating Credit VaR (CVaR) and Market VaR
• Portfolio CVaR – joint probabilities of default – copula techniques
• Techniques for estimating LGD and recovery rates

Day 6

Sovereign Credit Risk

• Principal factors used to determine credit worthiness of a sovereign
• Issues relating to sovereign bonds under different jurisdictional frameworks
• Deterioration in public balance sheets –high debt/GDP ratios
• The linkage between sovereign risk and risks to the local banking system
• Macro-economic drivers of ratings - global imbalances, surplus/deficit nations
• Role of sovereign Credit Default Swap (CDS) market – is it still vital or declining?
• Sovereign debt re-structuring- bailouts/bail-ins
• Protection to different stakeholders – seniority of claims, the preferred status of central banks
• Collective Action Clauses (CACs)
• Sovereign domino thesis and financial contagion

Day 7

Stress Testing Methods, Benefits and Limitations

• Overview of sensitivity of credit to market risk, interest rate risk, systemic risk
• Explanation of the techniques for conducting stress tests
• Back testing using historical returns
• Stress testing using hypothetical returns
• Explanation of Principal Components Analysis
• Sizes of historical samples – are they sufficiently large to include wide variety of conditions?
• Benefits of more loosely coupled systems as less fragile.

Day 8

Interpreting Credit Related Market Data

• Monitoring government bond yields and changes to the term structure of interest rates for USD, euro, sterling, and yen
• Theories of the yield curve
  • Liquidity premium
  • Safe-haven premium
• Credit spreads for investment grade and high yield instruments relative to government issues and inter-bank rates.
  • Over Treasuries, over bunds, over gilts.
  • SOFR, SONIA, ESTER, overnight indexed swap (OIS), Euro Overnight Index Average (Eonia)
• Option Adjusted Spreads (OAS)
• Credit Default Swap (CDS) rates – estimation of probabilities of default
• Measuring market sentiment – investor confidence indices, contrarian indicators

Day 9

Credit Assessment and Financial Ratio Analysis

• Financial Statement Analysis
• Credit Assessment based on a detailed analysis of corporate balance sheets, income statements and cash flow statements
• Impact of Corporate actions - capitalization or consolidation, rights issues
• Financial ratios - Profitability, Liquidity, Asset turnover, Gearing
• Liquidity ratios, pay-out ratios, financial stability ratios, operational gearing
• Dividend policy, return on equity (ROE), Return on Capital Employed (ROCE)
• Earnings per share, P/E Ratios (historical and prospective)
• Dividend yield, Dividend/interest cover, Price/book
• Ratio-based Methods for Determining Credit Stress and Defaults
• Altman’s Z score model, KMV Model, Moody’s Analytics,
• Ohlson financial distress model, Risk Metrics, McKinsey Credit Portfolio View

Day 10

Managing Credit Risk and Regulatory Capital Charges for Credit Risk

• Mechanics of credit derivatives and how they can be used for hedging portfolio credit risk
• Single name credit derivatives (unfunded and funded structures)
• Basket and Tranche CDS, index-based CDS
• Impact on regulatory capital from use of, and exposure to, credit derivatives
• ISDA documentation and legal framework for interest rate (IR) swaps, Credit Support Annex (CSA)
• Regulatory capital under Basel III
• New approaches to capital charges for credit risk under Basel III
• Stress testing – how to conduct stress testing with Monte Carlo Simulations
• Calculating capital charges for credit exposures
  • Standardized approach
  • Foundation internal ratings-based approach
  • Advanced internal ratings-based approach