Advanced Credit Risk Analysis and Management

Inbunden, Engelska, 2013

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Beskrivning

Credit is essential in the modern world and creates wealth, provided it is used wisely. The Global Credit Crisis during 2008/2009 has shown that sound understanding of underlying credit risk is crucial. If credit freezes, almost every activity in the economy is affected. The best way to utilize credit and get results is to understand credit risk.Advanced Credit Risk Analysis and Management helps the reader to understand the various nuances of credit risk. It discusses various techniques to measure, analyze and manage credit risk for both lenders and borrowers. The book begins by defining what credit is and its advantages and disadvantages, the causes of credit risk, a brief historical overview of credit risk analysis and the strategic importance of credit risk in institutions that rely on claims or debtors. The book then details various techniques to study the entity level credit risks, including portfolio level credit risks.Authored by a credit expert with two decades of experience in corporate finance and corporate credit risk, the book discusses the macroeconomic, industry and financial analysis for the study of credit risk. It covers credit risk grading and explains concepts including PD, EAD and LGD. It also highlights the distinction with equity risks and touches on credit risk pricing and the importance of credit risk in Basel Accords I, II and III. The two most common credit risks, project finance credit risk and working capital credit risk, are covered in detail with illustrations. The role of diversification and credit derivatives in credit portfolio management is considered. It also reflects on how the credit crisis develops in an economy by referring to the bubble formation. The book links with the 2008/2009 credit crisis and carries out an interesting discussion on how the credit crisis may have been avoided by following the fundamentals or principles of credit risk analysis and management.The book is essential for both lenders and borrowers. Containing case studies adapted from real life examples and exercises, this important text is practical, topical and challenging. It is useful for a wide spectrum of academics and practitioners in credit risk and anyone interested in commercial and corporate credit and related products.

Produktinformation

Utgivningsdatum:2013-05-10
Mått:170 x 252 x 31 mm
Vikt:839 g
Format:Inbunden
Språk:Engelska
Serie:Wiley Finance Series
Antal sidor:448
Förlag:John Wiley & Sons Inc
ISBN:9781118604915

Utforska kategorier

Finansiering inom Ekonomi och Ledarskap

Mer om författaren

Ciby Joseph (FCA, FRM) is a veteran credit and finance professional with two decades of banking experience. His expertise includes credit risk analysis, credit risk management, financial analysis, relationship management, Basel regulations, investment management, derivatives and feasibility studies. His banking exposure included banks such as CSB, HSBC and Lloyds TSB. University Rank holder (1989) and a recipient of a ‘Letter of Appreciation’ from HSBC (2003) for best credit risk analysis, Ciby headed the corporate credit risk of Lloyds TSB Middle East where he enjoyed corporate credit sanction authority. He is currently a Director at Crowe Horwath, UAE and a Partner of Transcend Investments & Credit Advisory, India. Ciby advises CEOs, CFOs and senior executives on optimum credit/borrowing strategies and participates in strategic assignments with respect to financing, debt syndication and risk management and conducts classes on credit risk. He has also contributed articles to various publications including Global Association of Risk Professionals, (GARP) USA.

Innehållsförteckning

Preface xviiPart I Introduction1 Credit Basics 31.1 Meaning of Credit 41.2 Role of Credit 61.3 Credit Market 61.4 Credit – Advantages and Disadvantages 71.4.1 Merits of Credit 71.4.2 Demerits of Credit Usage 91.4.3 Is Wealth Creation Through Use of Credit Easy and Simple? 101.5 Suppliers of Credit 111.6 Credit Risk Study 12Appendix: Credit Creation 13Questions/Exercises 142 Essentials of Credit Risk Analysis 152.1 Meaning of Credit Risk 152.2 Causes of Credit Risk 162.3 Credit Risk and Return 172.4 Credit Risk Analysis 172.5 Historical Progress of Credit Risk Analysis 192.6 Need for Credit Risk Analysis 192.7 Challenges of Credit Risk Analysis 222.7.1 The Art and Science of Credit Risk Analysis 222.8 Elements of Credit Risk Analysis 24Questions/Exercises 253 Credit Risk Management 273.1 Strategic Position of Credit Risk Management 273.2 Credit Risk Management Context 283.3 Credit Risk Management Objectives 283.4 Credit Risk Management Structure 293.5 Credit Risk Culture 293.6 Credit Risk Appetite 303.7 Credit Risk Management in Non-Financial Firms 313.8 Credit Risk Management in Financial Intermediaries 313.8.1 Stages of Credit Risk Management in Financial Intermediaries 313.8.2 Credit Risk Management Process 33Questions/Exercises 34Part II Firm (or) Obligor Credit Risk4 Fundamental Firm/Obligor-Level Risks 374.1 Firm (or) Obligor Risk Classification 374.1.1 Business Risks or Operating Risks (OR) 374.1.2 Financial Risks (FR) 384.2 Risk Matrix 394.3 Different Risk Levels 394.3.1 Low Operating Risk and Low Financial Risk 394.3.2 Low Operating Risk and Medium Financial Risk 394.3.3 Low Operating Risk and High Financial Risk 404.3.4 Medium Operating Risk and Low Financial Risk 404.3.5 Medium Operating Risk and Medium Financial Risk 404.3.6 Medium Operating Risk and High Financial Risk 404.3.7 High Operating Risk and Low Financial Risk 404.3.8 High Operating Risk and Medium Financial Risk 414.3.9 High Operating Risk and High Financial Risk 41Questions/Exercises 425 External Risks 435.1 Business Cycle 435.1.1 Benefits of Study of Business Cycles 455.1.2 Credit Risk in the Business Cycle 465.2 Economic Conditions 465.2.1 Private Consumption 475.2.2 Government Spending 475.2.3 Investment 485.2.4 Imports and Exports 485.2.5 How to Link NI Components to the Firm 485.2.6 Benefits of Study of National Income 495.3 Inflation and Deflation 505.4 Balance of Payments and Exchange Rates 515.5 Political 525.6 Fiscal Policy 535.7 Monetary Policy 535.8 Demographic Factors 545.9 Regulatory Framework 555.10 Technology 555.11 Environment Issues 555.12 International Developments 565.13 Others 565.14 Monitoring External Risks 57Questions/Exercises 586 Industry Risks 616.1 Understanding Obligor’s Industry or Market 616.1.1 Sector vs. Industry vs. Market Segment 616.1.2 Challenges of Industry Classification 626.2 Types of Industry Risks 636.3 Industry Life Cycle 646.4 Permanence of Industry 656.5 Government Support 656.6 Industry and Factors of Production 666.7 Industry and Business Cycles 666.8 Industry Profitability 676.8.1 Competition Among the Existing Firms Within the Industry 686.8.2 Threat of New Entrants 686.8.3 Threat of Substitute Products 696.8.4 Bargaining Power of Buyers 696.8.5 Bargaining Power of Suppliers 706.9 Competitor/Peer Group Analysis 71Questions/Exercises 777 Entity-Level Risks 797.1 Understanding the Activity 807.2 Risk Context and Management 817.3 Internal Risk Identification Steps 827.3.1 Interviews and Questioning 827.3.2 Market Developments and Peer Comparison 837.4 SWOT Analysis 837.5 Business Strategy Analysis 847.5.1 Cost Leadership 857.5.2 Differentiation 867.5.3 Contraction 867.5.4 Market Penetration 867.5.5 New Markets 877.5.6 New Products/Product Synergy Diversification 877.5.7 Product/Market Diversification 877.5.8 Consolidation 877.5.9 Merger/Takeover 877.5.10 Expansion 887.5.11 Cost Control 887.5.12 Focus 887.6 Pitfalls in Strategy 897.7 Management Analysis 907.7.1 One-Man Rule 917.7.2 Joint Chairman/CEO/MGD Position 917.7.3 Imbalance in Top Management Team 917.7.4 Weak Finance Function 927.7.5 Lack of Skilled Managers (or Inability to Attract Skilled Managers in Key Positions) 927.7.6 Disharmony in Management 927.7.7 Change in Ownership 927.7.8 Cultural Rigidity 927.7.9 Lack of Internal Controls 937.7.10 Low Staff Morale 937.7.11 Fraudulent Management 937.7.12 Myopic Vision 937.7.13 Big Projects 937.7.14 Inadequate Response to Change 947.7.15 Poor Corporate Governance 947.8 Other Internal Risks 94Questions/Exercises 978 Financial Risks 998.1 Importance of Financial Statements 998.2 Quality and Quantity of Financial Statements 1018.2.1 Quality of Financial Statements 1018.2.2 Quantity of Financial Statements 1028.3 Role of Historical Financial Statements 1028.4 Financial Analysis 1038.4.1 Balance Sheet 1038.4.2 Income Statement (or) Profit and Loss Account 1048.4.3 Cash Flow Statement (CFS) 1058.5 Analytical Tools 1058.5.1 Accounting Analysis 1058.5.2 Common Sizing Analysis (CSA) 1078.5.3 Indexed Trend Analysis (ITA) 1108.5.4 Ratio Analysis 1138.6 Solvency Ratios 1158.6.1 Liquidity Ratios 1158.6.2 Long Term Solvency Ratios 1178.6.3 External Finance Ratios 1208.6.4 Dividend and Equity Ratios 1208.6.5 Cash Flow Ratios 1218.7 Operational Ratios 1238.7.1 Performance Ratios 1238.7.2 Profitability Ratios 1248.7.3 Return on Investment (ROI) Ratios 1258.7.4 Asset Management (or Activity) Ratios 1268.7.5 Leverage (Operating and Financial) Ratios 1288.7.6 Cost-Volume-Profit (CVP) Ratios 1338.8 Encapsulated Ratios 1348.8.1 Dupont Model 1348.8.2 Predictive Power of Ratios 135Questions/Exercises 1439 Integrated View of Firm-Level Risks 1479.1 Relevance of an Integrated View 1479.2 Judgement 1479.3 Identifying Significant Credit Risks 1489.4 Risk Mitigants 1509.5 Types of Mitigants 1509.5.1 Qualitative Mitigants 1509.5.2 Quantitative Mitigants 1529.5.3 Difference between Qualitative and Quantitative Mitigants 1539.6 Principles to be Borne in Mind While Selecting Mitigants 1539.7 Monitoring of Credit Risk 154Appendix: Credit Risks and Possible Mitigants 155Questions/Exercises 15810 Credit Rating and Probability of Default 16110.1 Credit Risk Grading 16110.1.1 Linking EIIF Evaluation to Credit Risk Grades 16110.1.2 Benefits of Credit Risk Grade System 16310.2 Probability of Default 16310.2.1 Benefits of PD Values 16510.2.2 PD Values and Credit Decisions 16510.3 External vs. Internal Rating 16610.3.1 Reliability of External Ratings 16710.3.2 Internal Ratings 16810.4 PD in Credit Structural Models 16910.4.1 The Merton Model (1974) 169Questions/Exercises 172Part III Credit Risks – Project and Working Capital11 Credit Risks in Project Finance 17711.1 Distinctive Features of Project Finance 17711.2 Types of Project Finance 17811.3 Reasons for Project Finance 17911.3.1 Scarce Resources 17911.3.2 Risk Sharing 17911.3.3 Off-Balance Sheet Debt 17911.3.4 Avoidance of Restrictive Covenants 17911.3.5 Tax Considerations 18011.3.6 Extended Tenor 18011.4 Parties Involved in Project Finance 18011.4.1 Sponsors 18011.4.2 Project Lenders 18011.4.3 Project Contractors/Consultants/Lawyers/Accountants 18111.4.4 Governments 18111.4.5 Multilateral Agencies 18111.5 Phases of Project and Risks 18211.5.1 Construction Phase Risks 18211.5.2 Start-Up Phase Risks 18211.5.3 Operational Phase Risks 18311.6 Project Credit Risks 18311.6.1 EIIF Risks 18311.6.2 Project Specific Risks 18411.6.3 Project Financial Viability Risks 18611.7 Financial Study 18711.7.1 Cash Flow Forecasts 18711.7.2 Estimation of the Economic Worth of the Project 18911.7.3 Assessing Creditworthiness – Building a Lender’s Case 19011.8 Project Credit Risk Mitigants 192Questions/Exercises 20212 Credit Risks in Working Capital 20712.1 Definition of Working Capital 20712.1.1 Working Capital Cycle – Finance Manager’s Key Concern 20712.1.2 Working Capital Cycle – Lending Bank’s Point of View 20812.2 Assessing Working Capital through the Balance Sheet 20812.3 Working Capital Ratios 21012.4 Working Capital Cycle 21212.5 Working Capital vs. Fixed Capital 21612.6 Working Capital Behaviour 21612.6.1 Availability of Finance 21712.6.2 Changes in Trade Terms 21812.6.3 Changes in Business Volume 21912.6.4 Price Changes 22212.6.5 Others 22212.7 Working Capital, Profitability and Cash Flows 22312.8 Working Capital Risks 22512.8.1 Over-trading 22512.8.2 Diversion Risk 22712.8.3 Inadequate Financial Management 22812.8.4 Inflation Risk 22812.8.5 Inadequate Provisioning of Working Capital in Original Project Costs 22812.8.6 Losses and Reducing Profitability 22812.8.7 Inadequate Structuring of Facilities by Banks 22912.8.8 Unforeseen Contingencies 22912.9 Impact of Working Capital Risks 22912.10 Working Capital Risk Mitigants 23012.10.1 Covenants 23012.10.2 Cancellation/Tightening/Temporary Freeze of Facilities 23012.10.3 Increase Pricing 23112.10.4 Liquidation of Non-Core Assets 23112.10.5 Owners’ Injection/Strengthening Net Working Capital 23112.10.6 Improvement of Working Capital Management 23112.10.7 Insure against the Risk from Unforeseen Contingencies 23112.11 Working Capital Financing 232Questions/Exercises 236Part IV Credit Portfolio Risks13 Credit Portfolio Fundamentals 24113.1 Credit Portfolio vs. Equity Portfolio 24113.2 Criticality of Portfolio Credit Risks 24213.3 Benefits of Credit Portfolio Study 24213.3.1 Active Credit Portfolio Management 24213.3.2 Overall Credit Risk Reduction 24313.3.3 Optimizes Liquidity 24413.3.4 Assists Sales and Marketing 24413.3.5 Insights into Sectoral Risk Exposures 24413.3.6 Solves the Capital Dilemma 24513.3.7 Portfolio Management Strategies 24613.3.8 Credit Quality Issues 24713.4 Portfolio Analysis 24713.5 Credit Portfolio Risk vs. Return 249Appendix: Organizational Conflict in Credit Risk Management 249Questions/Exercises 25114 Major Portfolio Risks 25314.1 Systematic Risk 25314.1.1 Triggers of Systematic Risk 25414.1.2 Consequences of Systematic Risk 25414.2 Diversifiable Risk 25514.3 Concentration 25814.3.1 Industry or Sector Concentration 25814.3.2 Exposure or Name Concentration 25914.3.3 Region/Location/Country Concentration 25914.3.4 Foreign Currency Concentration 25914.3.5 Collateral Risk 26014.3.6 Maturity Risks 26014.3.7 Funding Risk 26114.3.8 Correlation Risks 26214.4 Credit Portfolio Beta 263Questions/Exercises 26315 Firm Risks to Portfolio Risks and Capital Adequacy 26515.1 Obligor PD and Portfolio PD 26515.2 Migration Risk 26615.2.1 Firm Credit Risk Migration 26615.2.2 Portfolio Risk Migration 26815.2.3 Benefits of Migration Risk Study 26915.3 Default Risk 26915.3.1 Firm-Level Defaults 26915.3.2 Portfolio-Level Defaults 27015.4 Loss Given Default (LGD) 27015.5 Expected Loss (EL) 27115.5.1 Obligor EL 27115.5.2 Portfolio EL 27115.6 Provisioning 27215.6.1 Provisioning – Firm Level 27215.6.2 Portfolio-Level Provisioning 27315.7 Credit Loss Distribution 27415.7.1 Characteristics of Credit Loss Distribution 27515.7.2 Benefits of Developing a Credit Risk (or Loss) Distribution 27515.8 Economic Capital 27615.8.1 Regulatory Capital vs. Economic Capital 27715.8.2 Measuring Economic Capital 27815.8.3 Optimizing Economic Capital 279Questions/Exercises 28216 Credit Risk and The Basel Accords 28516.1 Basel Accords 28516.2 Basel I (1988) – First Basel Accord 28616.2.1 Criticisms of Basel I 28716.3 Basel Accord II (2006) 28816.3.1 Alternative Approaches for Credit Risk in Basel II 28916.3.2 Risk Weighted Assets (RWA) and Capital Adequacy in Basel II 29316.3.3 Do Higher LGD and PD Always Translate into Higher RWA under the IRB Approach? 29416.3.4 Criticisms of Basel II 29516.4 Basel III 29616.4.1 Credit Risk Measurement in Basel III 29716.4.2 Other Key Features of Basel III 29816.4.3 Can Basel III Prevent Future Financial/Credit Crises? 299Appendix 300Questions/Exercises 302Part V Portfolio Risk Mitigants17 Credit Risk Diversification 30517.1 Traditional Diversification 30517.1.1 Industry Limit 30617.1.2 Counterparty Limit 30717.1.3 Region-Wise Restriction 30717.1.4 Size 30817.2 Modern Diversification of Credit Portfolio 30917.2.1 Portfolio Selection Theory 30917.2.2 Application of PS in Credit Portfolio 31017.2.3 More Tools to Study Diversification of Portfolio Risks 31417.3 Correlations in Credit Risk Models 315Questions/Exercises 31518 Trading of Credit Assets 31718.1 Syndicated Loans/Credit Assets 31718.2 Securitization 31818.2.1 Asset Backed Securities (ABS) 31918.2.2 Collateralized Debt Obligations (CDO) 31918.2.3 Downfall of CDOs (and Similar Securitized Instruments) 32118.3 Distressed Debt 32118.4 Factoring 32218.5 Distressed Receivables 322Questions/Exercises 32219 Credit Derivatives 32319.1 Meaning of a Credit Derivative 32319.1.1 Credit Event 32419.2 Credit Default Swap (CDS) 32419.2.1 Is CDS an Insurance? 32619.2.2 CDS and Speculation 32719.2.3 Uses of CDS 32719.2.4 Sovereign CDS 32919.2.5 Criticism of CDS 32919.3 Total Return Swap 33019.3.1 Uses of TR Swap 33119.4 Credit Option (CO) 33219.5 Credit Spread Options (CSO) 33319.6 Credit Derivative Linked Structures 33319.7 Future of Credit Derivatives 33419.8 Credit Derivatives and Over-the-Counter (OTC) Markets 334Questions/Exercises 334Part VI Credit Risk Pricing20 Pricing Basics 33720.1 Credit Pricing Factors 33720.1.1 Credit Risk Premium 33720.1.2 Portfolio Risk 33920.1.3 Cost of Capital 34020.1.4 Cost of Leverage 34020.1.5 Sector Risks 34020.1.6 Overheads 34120.1.7 Other Factors 34120.2 Pricing Structure 34220.2.1 Interest Rates 34220.2.2 Commission and Fees 34420.3 Credit Risk Pricing Model 34420.4 Prime Lending Rate 345Questions/Exercises 34821 Pricing Methods 34921.1 RORAC (Return on Risk-Adjusted Capital) Based Pricing 34921.2 Market Determined 35121.3 Economic Profit Based Pricing 35121.4 Cost Plus 35321.5 Structured Pricing 35321.6 Grid Pricing 35421.7 Net Present Value (NPV) Pricing 35421.8 RANPV (Risk-Adjusted NPV) Pricing 355Questions/Exercises 355Part VII The Last Line of Defence – Security22 Security Basics 35922.1 Need for Security 35922.2 Merits and Demerits of a Security 36022.2.1 Advantages to the Creditor 36022.2.2 Disadvantages to the Creditor 36022.2.3 Advantages to the Borrower 36122.2.4 Disadvantages to the Borrower 36122.3 Attributes of a Good Security 36222.4 Security and Pricing 36222.5 Impact of Systematic Risks on Security 36422.6 Facility Grades 364Questions/Exercises 36623 Collaterals and Covenants 36723.1 Tangible Security 36723.1.1 Deposits (with Banks, Financial Institutions, etc.) 36723.1.2 Stock and Shares 36723.1.3 Property/Land 36723.1.4 Goods 36823.1.5 Gold or Other Precious Metals 36823.1.6 Bank Guarantees/Letters of Credit 36823.2 Intangible Security 36923.2.1 Unregistered Charges 36923.2.2 Assignment of Debtors 36923.2.3 Corporate Guarantee 36923.2.4 Letter of Comfort (LOC) 37023.2.5 Letter of Awareness 37023.2.6 Letter of Negative Pledge 37023.3 Methods of Taking Security 37123.3.1 Mortgage 37123.3.2 Pledge 37123.3.3 Hypothecation 37223.3.4 Lien 37223.4 Realizing Security 37223.5 Covenants – A Trigger to Seek Additional Security 37323.5.1 Financial Covenants 37323.5.2 Non-Financial Covenants 376Questions/Exercises 377Part VIII Credit Crisis24 Road to Credit Crisis 38124.1 Credit and Growth 38124.2 Role of Banks 38224.2.1 Credit Creation 38224.2.2 Confidence in Banking 38324.2.3 Ultimate Use of Credit 38424.3 Formation of Credit Bubbles 38524.4 Types of Credit Bubble 38624.5 Credit Bubble Explosion 387Questions/Exercises 39025 2008 Credit Crisis 39325.1 Credit Asset – Prime vs. Sub-Prime 39325.2 Securitization 39425.2.1 Higher Risk Appetite 39425.2.2 Availability of CDS 39525.3 US Housing Bubble 39625.4 Role of OTC Derivatives 39825.4.1 Reasons for Popularity of OTC Derivatives 39925.4.2 Complexity and Opaqueness – the Hallmark of OTC Derivatives 39925.4.3 Systemic Risk and OTC Derivatives 40025.5 Role of Rating Agencies 40025.6 Why Did the Bubble Burst? 40125.7 Consequences 40225.7.1 2007 40225.7.2 2008 40225.7.3 2009 40325.8 Impact of the Lehman Collapse 40325.9 Housing Crisis to Credit Crisis to Economic Crisis 40425.10 Common Factors 1929 vs. 2009 40625.11 Lessons of the 2008 Credit Crisis 407Questions/Exercises 410Bibliography 411Index 415