Credit Risk Management Basic Concepts

by Baesens, Bart; van Gestel, Tony

• ISBN13: 9780199545117
• ISBN10: 0199545111
• Format: Hardcover
• Copyright: 2009-01-05
• Publisher: Oxford University Press

Summary

Credit Risk Management: Basic Concepts is the first book of a series of three with the objective of providing an overview of all aspects, steps, and issues that should be considered when undertaking credit risk management, including the Basel II Capital Accord, which all major banks must comply with in 2008. The introduction of the recently suggested Basel II Capital Accord has raised many issues and concerns about how to appropriately manage credit risk. Managing credit risk is one of the next big challenges facing financial institutions. The importance and relevance of efficiently managing credit risk is evident from the huge investments that many financial institutions are making in this area, the booming credit industry in emerging economies (e.g. Brazil, China, India), the many events (courses, seminars, workshops) that are being organized on this topic, and the emergence of new academic journals and magazines in the field (e.g. Journal of Credit Risk, Journal of Risk Model Validation, Journal of Risk Management in Financial Institutions). Basic Concepts provides the introduction to the concepts, techniques, and practical examples to guide both young and experienced practitioners and academics in the fascinating, but complex world of risk modelling. Financial risk management, an area of increasing importance with the recent Basel II developments, is discussed in terms of practical business impact and the increasing profitability competition, laying the foundation for books II and III.

Author Biography

Bart Baesens is assistant professor at K. U. Leuven and Vlerlck Leuven Ghent Management School (Belgium). He is also a lecturer at the University of Southampton (United Kingdom).

Table of Contents

Acknowledgements	p. ix
Introduction	p. xi
Chapter by chapter overview	p. xiii
Bank risk management	p. 1
Introduction	p. 1
Banking history	p. 2
Role of banks	p. 9
Balance sheet	p. 17
Sources of risk	p. 23
Risk management	p. 38
Regulation	p. 52
Financial products	p. 59
Credit scoring	p. 93
Introduction	p. 93
Scoring at different customer stages	p. 95
Score types	p. 105
Credit bureaus	p. 109
Overrides	p. 111
Business objectives	p. 112
Limitations	p. 113
Credit ratings	p. 115
Introduction	p. 115
Rating and scoring systems	p. 117
Rating terminology	p. 118
A taxonomy of credit ratings	p. 121
Rating system architecture	p. 143
Rating philosophy	p. 145
External rating agencies	p. 148
Rating system at banks	p. 157
Application and use of ratings	p. 162
Limitations	p. 165
Risk modelling and measurement	p. 168
Introduction	p. 168
System life cycle	p. 170
Overview of rating systems and models	p. 174
Data definition and collection	p. 201
Development	p. 251
Implementation	p. 264
Application and follow-up	p. 265
Validation, quality control and backtesting	p. 266
Portfolio models for credit risk	p. 273
Introduction	p. 273
Loss distribution	p. 274
Measures of portfolio risk	p. 278
Concentration and correlation	p. 285
Portfolio model formulations	p. 292
Overview of industry models	p. 306
Basel II portfolio model	p. 312
Implementation and application	p. 325
Economic capital and capital allocation	p. 327
Basel II	p. 344
Introduction	p. 344
Bank capital	p. 350
Pillar 1 (minimum capital requirements)	p. 354
Pillar 2 (supervisory review process)	p. 418
Pillar 3 (market discipline)	p. 431
Information technology aspects	p. 441
Market impact	p. 452
Future evolution	p. 479
References	p. 483
Index	p. 519
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