Managing Credit Risk

JOHN B. CAOUETTE is the former vice chairman of MBIA Insurance Corporation and is currently Chairman of Channel Capital Group, a European-based credit derivative products company. EDWARD I. ALTMAN, PHD, MBA, is the Max L. Heine Professor of Finance at the Stern School of Business, New York University. Previously, he chaired the Stern School's MBA Program for twelve years. He has been acclaimed as the world's leading academic on credit risk and distressed and high-yield debt for most of his forty-year career. PAUL NARAYANAN is Director of Credit Portfolio Analytics at American International Group, Inc. He has been involved with credit risk management for more than two decades and in the development and deployment of analytical solutions for credit issues. ROBERT W. J. NIMMO is the former group risk director of Barclays PLC, where he was responsible for all the risk management activities of the group covering credit, market, operational risk, and compliance. He was also the chief risk officer for Wachovia Corporation (2000–2001) and for Westpac Banking Corporation (1993–2000).

• About the Authors xiIntroduction xvChapter 1 Credit Risk: The Great Challenge For The Global Economy 1Chapter 2 Credit Culture 23Chapter 3 Classic Industry Players: Banks, Savings Institutions, Insurance: Companies, Finance Companies, and Special Purpose Entities 41Chapter 4 The Portfolio Managers: Investment Managers, Mutual Funds, Pension Funds, and Hedge Funds 59Chapter 5 Structural Hubs: Clearinghouses, Derivative Product Companies, and Exchanges 69Chapter 6 The Rating Agencies 81Chapter 7 Classic Credit Analysis 103Chapter 8 Asset-Based Lending and Lease Finance 117Chapter 9 Introduction to Credit Risk Models 127Chapter 10 Credit Risk Models Based upon Accounting Data and Market Values 139Chapter 11 Corporate Credit Risk Models Based on Stock Price 181Chapter 12 Consumer Finance Models 201Chapter 13 Credit Models for Small Business, Real Estate, and Financial Institutions 223Chapter 14 Testing and Implementation of Credit Risk Models 237Chapter 15 About Corporate Default Rates 251Chapter 16 Default Recovery Rates and LGD in Credit Risk Modeling and Practice 277Chapter 17 Credit Risk Migration 311Chapter 18 Introduction to Portfolio Approaches 325Chapter 19 Economic Capital and Capital Allocation 349Chapter 20 Application of Portfolio Approaches 367Chapter 21 Credit Derivatives 411Chapter 22 Counterparty Risk 437Chapter 23 Country Risk Models 455Chapter 24 Structured Finance 475Chapter 25 New Markets, New Players, New Ways to Play 509Chapter 26 Market Chaos and a Reversion to the Mean: The Rediscovery of Culture as a Critical Risk Management Tool 539Notes 553Appendix 569Index 607