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CREDIT RISK MANAGEMENT
THE COMMODITISATION OF CREDIT RISK TRENDS IN CREDIT RISK MANAGEMENT
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KEY PROPOSITION THE ADVENT OF ACTIVE AND LIQUID CREDIT TRADING WILL REQUIRE COMPLETE RE-ENGINEERING OF THE CREDIT FUNCTION & PROCESS ALTER THE NATURE OF BANKING FUNDAMENTALLY
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AGENDA KEY DRIVERS OF CHANGE CREDIT RISK MANAGEMENT PARADIGMS
CLASSICAL MODERN CREDIT RISK MANAGEMENT ARCHITECTURE IMPLICATIONS FOR FINANCIAL SERVICES
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KEY DRIVERS OF CHANGE KEY FEATURE OF CREDIT RISK
CENTRAL TO ALL FINANCIAL TRANSACTIONS TRADITIONAL VIEW OF CREDIT ILLIQUID CURRENT VIEW OF CREDIT LIQUID & TRADEABLE SHIFT FROM STATIC MANAGEMENT OF CREDIT TO DYNAMIC MANAGEMENT OF CREDIT RISK
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KEY DRIVERS OF CHANGE SHAREHOLDER VALUE ISSUES
RETURN ON CREDIT CAPITAL OPTIMISATION OF RETURN ON CREDIT CAPITAL CHANGES IN FINANCIAL SERVICES VALUE CHAIN IN FINANCIAL SERVICES TREND TO UNBUNDLING THE MICROSTRUCTURE
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PRODUCT FOCUS CLIENT FOCUS PRODUCT/ KNOWLEDGE MANAGEMENT
CAPITAL MANAGEMENT RISK MANAGEMENT TECHNOLOGY MANAGEMENT RISK ORIGINATION/ DISTRIBUTION PRODUCT MANUFACTURE PROCESSING/ ADMINISTRATION PRODUCT FOCUS CLIENT FOCUS
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KEY DRIVERS OF CHANGE CREDIT RISK MANAGEMENT PERFORMANCE
CONTROL FAILURES QUANTIFICATION OF CREDIT RISK INTERACTION OF MARKET AND CREDIT RISK CREDIT RISK PRICING INABILITY TO PRICE CREDITR ISK “CORRECTLY” INCONSISTENCY OF PRICING
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KEY DRIVERS OF CHANGE COSTS OF CREDIT RISK MANAGEMENT INFRASTRUCTURE
LIQUEFACTION OF CREDIT RISK SYNDICATION & ASSET SALES SECURITISATION CREDIT DERIVATIVES & CREDIT LINKED NOTES
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KEY DRIVERS OF CHANGE DEVELOPMENTS IN CREDIT ENHANCEMENT TECHNIQUES
BI-LATERAL MULTILATERAL ADVANCES IN CREDIT/ DEFAULT RISK THEORY INFRASTRUCTURE DEVELOPMENTS SYSTEMS CAPABILITIES
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KEY DRIVERS OF CHANGE CHANGE IN REGULATORY FRAMEWORK
SHIFT TO CAPITAL BASED REGULATION REGULATORY ARBITRAGE (POSSIBILITY) OF MODEL BASED CREDIT RISK CAPITAL
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KEY DRIVERS OF CHANGE KEY NEAR TERM FACTORS CREDIT CAPITAL MANAGEMENT
CREDIT PRICING CREDIT RISK MANAGEMENT REGULATORY DEVELOPMENTS SHIFTS IN BANKING STRATEGY
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CREDIT RISK PARADIGMS TYPES CLASSICAL MODERN KEY ISSUE
APPLICABILITY TO DIFFERENT MARKET SEGMENTS
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CREDIT RISK BY MARKET SEGMENT
SEGMENTS RETAIL MID-MARKET WHOLESALE/ CORPORATES DIMENSIONS RISK PRICING CREDIT METHODOLOGY LIQUIDITY AND TRADEABILITY
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NUMBER OF COUNTERPARTIES SIZE OF INDIVIDUAL EXPOSURE
LARGE RETAIL MID-MARKET NUMBER OF COUNTERPARTIES WHOLESALE SMALL HIGH LOW SIZE OF INDIVIDUAL EXPOSURE
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CLASSICAL PARADIGM CONCEPT ASSESS RISK AND MATCH WITH CAPITAL
RISK MANAGEMENT TECHNIQUES DIVERSIFICATION COLLATERAL SCHEMATIC
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CREDIT RISK MANAGEMENT
CAPITAL PROVISIONING RISK SYNDICATION CREDIT RISK MANAGEMENT CREDIT REQUEST TRANSACTION CREDIT FUNCTION ORIGINATION CLIENT CREDIT LIMIT TRANSACTION ORIGINATION PREPARATION OF CREDIT REQUEST PRICING/ STRUCTURING ADMINISTRATION CREDIT ASSESSMENT MONITORING CREDIT LIMIT & CREDIT ADMINISTRATION
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CLASSICAL PARADIGM KEY ELEMENTS CREDIT ANALYSIS AND ASSESSMENT PROCESS
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IMPLICATIONS OF CLASSICAL PARADIGM
CREDIT RISK ASSUMPTION CREDIT PRICING CREDIT CAPITAL MANAGEMENT CREDIT RISK FOCUS CHANGES IN CREDIT QUALITY PERFORMANCE ATTRIBUTION OF ORIGINATORS PERFORMANCE OF CREDIT FUNCTION
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MODERN PARADIGM CONCEPT
CREDIT RISK AS A SEPARATE TRADEABLE ASSET CLASS RISK MANAGED DYNAMICALLY THROUGH HEDGING AND TRADING TOOLS SCHEMATIC
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CREDIT PORTFOLIO MANAGEMENT & POSITIONING
TRANSACTION TRANSACTION ORIGINATION STRUCTURING/ PRICING ADMINISTRATION ORIGINATION CLIENT CREDIT REQUEST CREDIT LIMIT & CREDIT CHARGE CREDIT FUNCTION CREDIT ASSESSMENT CREDIT PORTFOLIO ANALYSIS CREDIT CAPITAL MANAGEMENT SYNDICATION/ ASSET SALES SECURITISATION CREDIT DERIVATIVES CREDIT TRADING CREDIT PORTFOLIO CREDIT PORTFOLIO MANAGEMENT & POSITIONING CREDIT CAPITAL CAPITAL MARKET
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CREDIT RISK ASSUMED & MANAGED
CREDIT CAPITAL TRANSACTION CREDIT RISK INTERNAL CREDIT DEFAULT SWAP CREDIT RISK CREDIT PORTFOLIO TRANSACTION ORIGINATOR RETURN CREDIT RISK CHARGE CREDIT HEDGES CREDIT RISK TRADED & HEDGED
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MODERN PARADIGM KEY ELEMENTS CREDIT ANALYSIS AND ASSESSMENT PROCESS
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IMPLICATIONS OF MODERN PARADIGM
CREDIT RISK ASSUMPTION CREDIT PRICING CREDIT CAPITAL MANAGEMENT CREDIT RISK FOCUS CHANGES IN CREDIT QUALITY PERFORMANCE ATTRIBUTION OF ORIGINATORS PERFORMANCE OF CREDIT FUNCTION
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IMPLICATIONS OF MODERN PARADIGM
CLIENT MANAGEMENT CORE VERSUS NON CORE CLIENTS HOME VERSUS FOREIGN MARKETS
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CREDIT RISK MANAGEMENT ARCHITECTURE
CONCEPT RISK MANAGEMENT SYSTEMS COMPONENTS INFORMATION SYSTEMS SCHEMATICS
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CREDIT EXPOSURE - STATIC & DYNAMIC (PFCE MODEL)
DEFAULT PROBABILITY/ RATINGS MIGRATION RECOVERY RATES DEFAULT CORRELATIONS PORTFOLIO MODELS PRICING MODELS RATING MODELS INTERNAL EXTERNAL CREDIT ANALYSIS CREDIT MODELS RISK DATA TRANSACTION DATA CREDIT DATA COLLATERAL NETTING CLEARING HOUSE OBLIGOR/ COUNTERPARTY DATA CREDIT ENHANCEMENT ECONOMIC CAPITAL REGULATORY CAPITAL PROVISIONING CREDIT CAPITAL MANAGEMENT LIMIT ADMINISTRATION REPORTING SETTLEMENT LIMITS RISK LIMITS
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IMPLICATIONS FOR FINANCIAL SERVICES
TYPES MICRO(OPERATIONAL) REDEFINITION OF CREDIT PROCESS WITHIN ORGANISATIONS MACRO(STRATEGIC) REDEFINITION OF BUSINESS FOCUS
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OPERATIONAL CHANGES RE-ENGINEERING THE CREDIT PROCESS
ALTERATION OF CREDIT RISK ARCHITECTURE/ INFRASTRUCTURE
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STRATEGIC CHANGES THEME
SHIFT FOCUS OF BANKS FROM HOLDER OF RISK TO ORIGINATORS AND DISTRIBUTORS OF RISK MODELS OF BANKING PRACTICE
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MODEL 1 - CLASSICAL BANKING MODEL
LOAN TRANSACTION DEPOSIT TRANSACTION DEPOSITOR BORROWER BANK BANK ORIGINATES, FUNDS, ADMINISTERS AND RETAINS CREDIT RISK OF BORROWER
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MODEL 2 - INVESTMENT BANKING/ SECURITIES MODEL
ISSUE OF SECURITIES DISTRIBUTION OF SECURITIES INVESTOR BORROWER BANK UNDERWRITING OF PLACEMENT OF SECURITIES AND SYNDICATION OF UNDERWRITING RISK OTHER BANKS BANK ORIGINATES TRANSACTION AND MAY ADMINISTER IT AS PAYMENT AGENT. FUNDING AND CREDIT RISK OF BORROWER IS TRANSFERRED TO INVESTOR. PRIMARY RISK IS UNDERWRITING WHICH IS SYNDICATED TO REDUCE RISK LEVEL,
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MODEL 3 - SECURITISATION MODEL
SALE OF LOAN BACKED SECURITIES LOAN TRANSACTION SECURITISATION VEHICLE BORROWER BANK INVESTOR SALE OF LOAN TO SECURITISATION VEHICLE BANK ORIGINATES AND ADMINISTERS THE LOAN. BANK SELLS LOAN TO SECURITISATION VEHICLE WHICH ISSUES LOAN ASSET BACKED SECURTIES. FUNDING AND CREDIT RISK OF BORROWER IS BORNE BY INVESTOR. BANK RISK IS CONFINED TO CREDIT RISK PRE-SALE TO SECURITISATION VEHICLE AND ANY UNDERWRITING RISK ON THE PLACEMENT OF THE LOAN ASSET BACKED SECURITIES
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MODEL 4 - ECONOMIC RISK TRANSFER MODEL
LOAN TRANSACTION CREDIT DEFAULT SWAP OR CREDIT LINKED NOTE INVESTOR/ OTHER BANK BORROWER BANK BANK ORIGINATES, FUNDS AND ADMINISTERS THE LOAN. CREDIT RISK OF BORROWER IS TRANSFERRED TO INVESTORS OR OTHER BANKS. BANK CREDIT RISK IS PRE ECONOMIC HEDGE ONLY. WHERE A CREDIT LINKED NOTE IS ISSUED THE INVESTOR/ OTHER BANK ALSO PROVIDES FUNDING.
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KEY CHALLENGES CREDIT RISK MODELLING PROBLEMS
DEVELOPMENT OF CREDIT TRADING CREDIT ENHANCEMENT PROBLEMS CHANGES IN CREDIT INFRASTRUCTURE CHANGE MANAGEMENT
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CONCLUSIONS THE ADVENT OF ACTIVE AND LIQUID CREDIT TRADING WILL REQUIRE COMPLETE RE-ENGINEERING OF THE CREDIT FUNCTION & PROCESS ALTER THE NATURE OF BANKING FUNDAMENTALLY
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