The Handbook of Credit Portfolio Management - Hardcover

Gregoriou, Greg N.; Hoppe, Christian

Hardcover

ISBN 10: 0071598340 ISBN 13: 9780071598347

Verlag: McGraw-Hill Education Ltd, 2008

Inhaltsangabe

As the credit bubble fallout plagues the institutional finance sector--and will continue to do so in coming years--a strategic approach to credit portfolio management has never been more critical. The Handbook of Credit Portfolio Management provides all the information you'll need to successfully rebalance and manage your credit portfolios.

Together with co-author Christian Hoppe and a team of thirty-five international contributors, Greg N. Gregoriou provides strategies for calculating risk-weighted assets, reevaluating hedging strategies, and implementing Basel II standards. Providing a thoroughly global perspective of the subject, this comprehensive guide includes input from Moorad Choudhry (Group Head of Treasury at Europe Arab Bank plc, London); Christophe Godlewski (Université Louis Pasteur in Strasbourg, France); Roland Fuss (University of Freiburg, Germany); and Valerio Potí (Trinity College in Dublin, Ireland), who shed light on such key topics as:

• Investment opportunities of hedge funds
• Basis arbitrage trading strategies
• Issues regarding securitization of a sector basket
• Cost-saving aspects of portfolio hedging with credit futures

The Handbook of Credit Portfolio Management covers the latest developments and most current portfolio management techniques to help you implement strategies that best suit your institution's needs.

Über diesen Titel

Über die Autorin bzw. den Autor

Greg N. Gregoriou is Professor of Finance in the School of Business and Economics at the State University of New York, Plattsburgh. He holds a Ph.D. in finance from the University of Quebec in Montreal. Gregoriou specializes in hedge funds, funds of hedge funds, and managed futures. He has published 26 books and more than 50 journal articles and serves as hedge fund editor for the Journal of Derivatives and Hedge Funds and editorial board member of the Journal of Wealth Management and the Journal of Risk Management in Financial Institutions.

Christian Hoppe works as senior specialist for securitization and credit derivatives in the credit portfolio management in the corporate banking of Commerzbank AG Frankfurt. Prior to this, he was credit portfolio manager at Dresdner Kleinwort, the Investment Bank arm of Dresdner Bank AG in Frankfurt. He started his career as a Business and Financial Controller for Dresdner Bank. While earning his master's degree, Hoppe served in the Institutional Research Department of Benchmark Alternative Strategies GmbH, Frankfurt. He is the author of Derivatives Based on Alternative Investments.

Auszug. © Genehmigter Nachdruck. Alle Rechte vorbehalten.

THE HANDBOOK OF CREDIT PORTFOLIO MANAGEMENT

The McGraw-Hill Companies, Inc.

Copyright © 2009 The McGraw-Hill Companies, Inc.
All right reserved.
ISBN: 978-0-07-159834-7

Contents

Chapter One

Implementing Credit Portfolio Management

Thomas Ridder

ABSTRACT

As more credit markets have become liquid in recent years and new financial instruments have been developed, an increasing number of institutions became capable of active portfolio-based credit management. Thus, implementing a dedicated credit portfolio management function has evolved as a major project in many financial institutions. This chapter discusses fundamental issues in setting up this function.

INTRODUCTION

The management of credit portfolios in financial institutions has undergone material changes in the last decade. Due to essentially illiquid credit markets, until the mid-1990s, relationship banking dominated credit business and lead to positions that were mainly buy and hold. Accordingly, financial institutions understood credit management mainly as a part of their client management. The focus of credit management was set on the analysis, monitoring, and risk-return measurement of individual clients. The rationale behind this was the cognition that "at the end of the day," it is always individual obligors that default. Accordingly, a single-client-based design of business processes and risk measurement was regarded as adequate to ensure a sufficient quality of credit management. If used at all, the phrase credit portfolio management was mainly understood as consecutively monitoring and processing the positions of a given credit portfolio.

Today's credit portfolio management (CPM) practice does not consider a portfolio just a collection of financial positions any more, put together mainly for administrative purposes. Rather, CPM understands a portfolio as a set of interdependent credit positions with related risk-return profiles. The focus on understanding and profitably shaping these relationships constitutes the difference from traditional credit management. Credit portfolio management delivers additional value by creating higher transparency with respect to the portfolio's key characteristics, which by itself usually helps to make more efficient management decisions. Advances from modern statistical portfolio analysis are picked up and deliver a toolbox comparable to the well-known quantitative instruments that tackle market risk. However, CPM also opens up new sources of additional income for financial institutions. Immediate cash flows are generated by driving origination to accomplish more risk adequate prices, by freeing capital tied up to less profitable assets to foster profitable growth or by fees from trading, structuring, or repackaging credit risk. Felsenheimer et al. (2006) and De Servigny and Renault (2004) provide a detailed introduction to strategies, methods, and instruments of modern CPM.

This chapter surveys major issues when implementing a CPM function in financial institutions. It addresses the change management necessary to transform an essential buy-and-hold credit strategy to a more active approach of shaping the performance of credit portfolios. The second section of this chapter discusses the potential levers of CPM, and the third section highlights questions of the organizational implementation of CPM functions. Recent experience with the so-called subprime crisis has heavily challenged the use of quantitative methods in CPM. As such, the fourth section of this chapter will pick up some of the arguments. The chapter concludes with some evidence from a market survey.

THE LEVERS OF CREDIT PORTFOLIO MANAGEMENT

In general, the outline of credit portfolio management in financial institution encompasses a great variety of potential activities and responsibilities. This can easily be recognized by discussing a stylized credit process (Figure 1.1) from a CPM point of view.

Step 1: Individual Risk Analysis

The first step is the classical credit risk management responsibility, which is focused on analyzing the credit risk linked to individual obligors or projects before granting new loans and other defaultable contracts. The creditworthiness of the individual risk positions is to be revealed and is transformed into the probability of future obligor or project default, ultimately. Elaborate analysis is usually necessary to minimize asymmetric information between obligors and creditors and, thus, to reduce implications of moral hazard and adverse selection. This is achieved by analyzing business plans, balance sheets, income statements, and additional information from the customer relationship management typically to be attached to credit applications. Most financial institutions today apply internal rating systems for individual credit analysis. These were developed not just for reasonable and consistent economic risk assessment but in many institutions to also determine regulatory capital requirements. Thus, obligor and project risk analysis delivers the basic input of managing the quality of inflow to the credit portfolio. By definition, this analysis does not refer to comprehensive portfolio-based reasoning.

Step 2: Pricing and Credit Approval

The second step of the credit process might introduce specific portfolio-based activities. First, to ensure sustained profitability of the credit business risk adequate prices have to be accomplished. It is important to recognize that a requirement of sufficient high profitability is reasonable ex-ante and on a mean portfolio level, only. Due to the binary character of default events, any credit position that suffers a default will typically result in a net loss. Margins received up to the credit event rarely cover subsequent losses of principal and interest. Otherwise, in the case of no default a certain profit can be earned from the position. As there always will be some residual risk in credit analysis, ex post wrong decisions will continue to be derived in some cases, and this will possibly lead to losses with respect to some individual credit positions. The goal of risk adequate pricing is, thus, to generate enough aggregated earnings on the portfolio to provide an adequate net return on capital with a high degree of confidence. Therefore, typical loan pricing systems require that loan prices have to cover the following four different building blocks: (1) funding cost, (2) administrative and operational cost, (3) expected loss, and (4) a given target profitability above cost constituents (1) to (3).

Funding cost, administrative cost, and expected loss can be allocated to single risk positions in a straightforward way. The breakdown of the target portfolio profitability to required individual profit margins affords a little reflection. In general, a simple, flat profit margin will not be accepted since more risky positions ought to contribute more earnings to the portfolio than less risky ones. Portfolio profitability is usually defined as the economic performance of the capital required to cover total portfolio risk. A natural way to determine individual profit margins would then be to break down total capital to individual risk positions and determine the required pro rata profitability. Expressed as a margin on nominal exposure, this price component is usually called cost of economic capital.

The breakdown of total capital may be achieved according to regulatory rules or according to the institution's internal portfolio model. While being basically simple, the regulatory approach has several shortcomings when applied to...

Details zur Ausgabe

• Verlag: McGraw-Hill Education Ltd
• Erscheinungsdatum: 2008
• Sprache: Englisch
• ISBN 10: 0071598340
• ISBN 13: 9780071598347
• Einband: Gebundene Ausgabe
• Anzahl der Seiten: 504
• Kontakt zum Hersteller: Nicht verfügbar
• Verantwortliche Person: Nicht verfügbar