Degenerating Bank's Risk Frameworks

It is a tragic end to the year for risk management in banking where the regulator's fascination with Risk Comparability and Risk Framework Uniformity has reduced banking risk management solutions to nothing more than Risk = BCI x ILM.

RMA Credit Risk Brown Bag

If you are in Singapore on the 17th of September and you work in the world of credit risk, this RMA credit risk program looks like an interesting presentation to attend.

Addressing Procyclicality

Basel III is actually proving to be quite an ordeal for both the banking community as well as the regulators and some senior members of the regulatory community, both in the UK and the US have made public statements to this fact.

Perhaps one of the biggest issues facing banks with Basel III is how to address Procyclicality, especially if the bank is not running an Advanced IRB credit risk framework. Actually, just obtaining information about the different accepted practices on how to measure Procyclicality within a lending portfolio isn't so easy.

Just the other day I was pointed in the direction of a really good summary and publication on Procyclicality and I wanted to share this link here on the Causal Capital blog.

Concentration Risk

The quantification of Credit Risk has both normal and stressed modes of measurement, just as all measures of risk do. However, when an analyst attempts to quantify stress in credit portfolios, they should attempt to dimension the concentration risk aspects of their portfolio in line with the stress test they have in mind.

  

In this blog post we look at the stress testing aspects around concentration risk and a presentation has also been attached to the end of this journal which can be downloaded. This presentation investigates standard and accepted practices for measuring concentration risk in credit portfolios.

UK Banks heading for another disaster

Unbelievable but unfortunately it appears that UK banks are heading for another disaster and so soon after the recent credit crisis took grip of the country.

It was reported by the FSA that UK banks have been hiding distressed retail assets on their books by forcing a restructure to the amount of 63% of their entire home loan portfolios. This is dire, perhaps one of the most serious pieces of news I have read for the last six months and it is right up there with the possible collapse of the US dollar. In this blog, we are going to take look at this claim and its potential implications for the British economy.

Economist Intelligence Unit - Risk Radar 2011

The Economist Intelligence Unit has recently published a survey on risk management preparedness for global businesses which reports some interesting findings.

Continue reading to see summary

US regulators release new rules for Credit Risk Retention

New proposed rules for Asset Backed Securities have been released by the US regulatory agencies for comment. 

These rules are aimed at addressing the way in which banks securitize their loan portfolios and are a response to one of the main causes for the credit crisis in 2008.

What lies ahead for banks and investors?

ISO 10674 standard for credit rating agencies

International Organization for Standardization has recently published a new ISO standard that targets rating agencies directly. ISO announced this release on the 30th of March 2011 and is classifying the program as the Credit Rating Agency Standard; which will be a unique set of requirements to assist with improving the way credit rating agencies operate and report ratings.

In this article we are briefly going to look at labelled ISO 10674, what this standard aims to achieve, why it has come into existence and how it could be a game changer for the credit rating agencies.

Basel III might be the sun behind the dark clouds for rating agencies

Dark clouds are on the horizon for rating agencies and while many banks have become public enemy number one, the rating agencies aren't off the hook from their hand in the Credit Crisis either.  I am not saying it is curtains for the rating agencies but the world is certainly going to change for them.

The affront on rating agencies

In 2006, the Securities and Exchange Commission passed a Credit Rating Agency reform act which was to stipulate a set of guidelines to determine which rating agencies can be classified as Recognized Statistical Rating Organisations and to guard against conflicts of interest, the act can be found by following this link.  Given the outcome of the Credit Crisis in the backdrop of this act and the role the rating agencies played in masking risk across a whole range of assets, not to mention the credibility of the credit assessment process itself, the act might be deemed as being ineffective. I fair the issue was more likely that the SEC ruling was simply passed into law too late in the day and the Credit Crisis was already underway.

None the less, the US regulators aren't letting go of this.

  

The Sequel to Bayesian Credit Scoring

View Presentation or Alternative Download Site

 
A short story or the sequel to Bayesian modelling is an extension of my first article on the subject which can be found here.  This first presentation seemed to generate a lot of interest and questions from readers across the planet and I wanted to address these queries by extending the article further.  Feel free to download the sequel presentation and I promised myself this was not to take more than a few hours to pull together so in places it is a tad grainy, even with the occasional hand written formula. If you would like the PowerPoint presentation for clarity sake, just touch base on linked-in and I will be more than happy to send it through to you as a presentation in email.

So what variables should we capture to measure default in a borrower, click to read more.

Advantages of Bayesian Credit Scoring Models

View Presentation or Alternative Download Site

At a top level credit risk analysts have to solve three problems across both their banking and trading books to fulfill many of their goals.

The first is being able to calculate the amount of notional exposure, leverage and potential loss that may occur from positions clients take with the bank. These calculations are carried out at a trade and portfolio level referencing netting and non-netting offsets.  This is referred to as the Exposure at Default (EAD).

The second problem credit analysts need to be able to quantify is recovery rates from these exposures and to take total losses divided by the Exposure at Default to create a Loss Given Default (LGD) value.  The LGD is also in some respect equivalent to (1 – (Recovery Value/Present Value of Future Cash Flows)).

Click to read more about Probability of Default, our third variable.