Credit Risk Management for SME Banking Master Class
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Credit Risk Management for SME Banking Master Class Course
Introduction:
The Credit Risk Assessment course provides participants with a comprehensive understanding of the fundamental concepts and methodologies involved in assessing credit risk. It covers the drivers of credit risk, the modeling tools utilized for credit risk measurement, and current best practices in credit risk management techniques.
The course not only focuses on the practical aspects of credit risk assessment within financial institutions but also explores the cutting-edge quantitative and methodological tools and procedures used to measure, mitigate, and manage credit risk effectively.
The treatment of credit risk has undergone significant changes since the global financial crisis of 2008. The crisis shattered the belief that major investment banks and global insurers were immune to defaults and incapable of triggering systemic credit and liquidity crises. As a result, there has been a widespread reassessment of legacy risk management techniques.
Financial regulators and the Basel Committee on Banking Supervision have placed considerable emphasis on the development of innovative and robust methods for modeling financial stress and credit market deterioration, as witnessed during the crisis.
By attending this course, participants will gain insights into the evolving landscape of credit risk assessment. They will learn about the latest techniques and practices used in the industry and acquire the necessary skills to navigate the challenges of credit risk in the current financial environment.
Course Objectives:
At the end of this Credit Risk Management for SME Banking Master Class Course, learners will be able to do:
- Identify the key elements of credit risk
- Analyze the micro-financial drivers of credit risk and macro-economic factors that impact system-wide credit risk
- Explain modeling techniques for assessing credit risk
- Demonstrate proficiency with different methods and tools for credit scoring
- Demonstrate the usage and risks of credit derivatives
- Apply collateral management techniques to credit derivatives exposures
Who Should Attend?
This course is beneficial for banking personnel in all areas of credit risk. Others who will benefit include, but are not limited to, asset allocators, portfolio strategists, sovereign wealth fund managers, and research staff, risk managers/controllers, private investors, and senior back-office personnel. The course is also valuable for those interested in credit modelling and those engaged in compliance with all applicable regulations regarding credit risk in financial institutions.
Course Outlines:
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, 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 modeling, risk profiling, and assessing creditworthiness
Credit Ratings Methodologies and Application
- Review of rating classifications systems of the major Credit Rating Agencies (CRAs)
- The principal credit rating agencies – Moody’s, Standard & Poor’s, Fitch
- Overview of the rating 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?
- Rating migration matrices – used 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
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), the 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 through other comprehensive income (FVOCI)
- Fair value through profit or loss (FVPL)
Counter-Party Credit Risk
- Examine the various facets of credit risk which hinge on losses sustained from the failure of an obligor to honor 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 in relation to capital buffers
- Determination of a credit default event, ISDA Master Agreement, Credit Support Annex
- Understand the concepts of credit rating and scoring and critical examination of 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)
Measuring Credit Risk and Techniques for Credit Risk Modelling
- Credit Metrics, credit scoring, and credit rating systems
- Quantitative modeling 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 the modeling default risk of CDO’s, CMO’s and other structured vehicles
- Lessons from SIVs and other off-balance sheet financings 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
Sovereign Credit Risk
- Principal factors used to determine credit worthiness of a sovereign
- Issues relating to sovereign bonds under different jurisdictional frameworks
- Deterioration