Credit Risk Assessment, Modelling and Management

Course overview

The 2008 financial crisis prompted reassessment of how institutions measure credit and liquidity risk. This course examines that change alongside the emphasis placed by regulators and the Basel Committee on Banking Supervision on modelling financial stress and deterioration in credit markets. Delegates study the methods used within financial institutions to assess borrowers and portfolios.

Measurement begins with default and loss. Thirteen modules examine credit ratings and accounting treatments before moving into counterparty exposure, quantitative models and sovereign risk, including the connections between national debt and local banking systems. Work on stress testing addresses both its uses and its limitations. Market data and company financial statements provide further material for credit assessment.

Excel models support practical credit analysis. The later modules examine derivatives used to hedge exposures, capital charges under Basel III and Monte Carlo stress testing. Collateral work considers ISDA documentation, netting and Credit Valuation Adjustment (CVA), including the consequences of bilateral risk and over-collateralised positions.

Course objectives

By the end of the course, delegates will be able to:

Identify the main components of credit risk
Analyse financial drivers at borrower level and macroeconomic influences on system-wide credit risk
Explain methods for modelling credit exposure
Apply different credit-scoring tools and methods
Demonstrate how credit derivatives are used and assess their risks
Apply collateral management methods to exposures arising from credit derivatives

Target competencies

Modelling credit risk
Assessing credit requests
Evaluating funding loans and credit facilities
Compliance with credit regulations
Management of credit and risk committees

Who should attend

This course suits:

Banking staff working in any area of credit risk
Asset allocators and portfolio strategists
Sovereign wealth fund managers and researchers
Risk managers and controllers
Private investors and senior back-office staff
Professionals interested in credit modelling
Staff responsible for compliance with credit risk regulations in financial institutions

Training methodology

Delegates use Excel models to analyse credit and complete individual calculation exercises.
Team activities and plenary discussions examine methods and their application.

Course modules

Module 1
Credit risk drivers and basic measures
- Macroeconomic and micro-financial concepts driving credit risk
- Measuring credit exposure and adverse outcomes
- Assessing default probability and credit risk across loan portfolios
- Determinants used in managing credit risk
- Estimating Probability of Default (PD)
- Measuring Exposure at Default (EAD)
- Assessing Loss Given Default (LGD)
- Credit migration through transition matrices
- Fundamental statement analysis, ratios and qualitative balance-sheet characteristics
- Contingent and off-balance-sheet credit exposure
- Market measures using bond spreads and swap rates
- Understanding counterparty credit risk
- Scoring and modelling credit, profiling risk and assessing creditworthiness
Module 2
Using and evaluating credit ratings
- Classification systems used by Credit Ratings Agencies (CRAs)
- The roles of Moody's, Standard & Poor's and Fitch
- Rating methods involving issuers, historical information and business cycles
- Rating commercial paper
- Sovereign rating approaches for developed and emerging markets
- Conflicts between serving issuers and protecting credit purchasers
- CRA failures in rating collateralised debt obligations (CDOs) and other derivatives
- Banks' use of ratings migration matrices for credit value at risk (VaR)
- Market views of creditworthiness following upgrades and downgrades
- Dodd-Frank Act provisions reducing reliance on external ratings
Module 3
Accounting treatment and capital requirements
- Distinguishing trading-book and banking-book exposures
- Basel III measures addressing regulatory arbitrage
- Accounting treatment of securitisations and off-balance-sheet positions
- Available for Sale treatment, liquidity, high-quality liquid assets (HQLA) and balance-sheet rigidity
- Examining IFRS 9, its implementation timetable and potential revisions
- Recognising expected losses and early signs of asset impairment
- Amortised cost and held-to-maturity requirements
- Fair value measurement through OCI (FVOCI)
- Fair value measurement through profit or loss (FVPL)
Module 4
Assessing counterparty exposure
- Losses when an obligor fails to meet contractual commitments
- Separating the components of credit risk
- Reliability of estimates of obligor default probability
- Counterparty downgrade probabilities and widening credit spreads
- Estimating the recovery percentage after default
- Measuring credit losses relative to capital buffers
- Defining default events through the ISDA agreement and Credit Support Annex
- Evaluating ratings and scores as indicators of actual default risk
- Basel III responses to counterparty default and declining credit quality
- Credit Valuation Adjustment (CVA) and Debt Valuation Adjustment (DVA)
- Expected Exposure (EE), Expected Positive Exposure (EPE) and Wrong Way Risk (WWR)
Module 5
Quantitative approaches to credit modelling
- Credit Metrics and systems for credit scoring and rating
- Using stochastic processes to model credit risk
- Default probability estimation with the KMV Model and distance-to-default methods
- Interpreting a firm's debt and equity as options
- Modelling defaults in CDOs, CMOs and other structured vehicles
- Lessons from SIVs and other off-balance-sheet financing
- Extending VaR to measure default value at risk
- Scaling credit migration matrices across time horizons
- Combining Credit VaR (CVaR) with Market VaR
- Joint default probabilities and copulas in portfolio CVaR
- Estimating LGD and recovery rates
Module 6
Creditworthiness of sovereign borrowers
- Factors determining sovereign creditworthiness
- Jurisdictional differences affecting sovereign bonds
- Public balance-sheet deterioration and high debt-to-GDP ratios
- Connections between sovereign and domestic banking risks
- Rating influences from global imbalances and surplus or deficit nations
- Assessing the role of the sovereign Credit Default Swap (CDS) market
- Restructuring sovereign debt through bail-outs and bail-ins
- Stakeholder protection, claim seniority and central banks' preferred status
- The role of Collective Action Clauses (CACs)
- The sovereign domino thesis and financial contagion
Module 7
Designing and evaluating stress tests
- Credit sensitivity to market, interest rate and systemic risks
- Methods for conducting stress tests
- Back-testing against historical returns
- Stress tests based on hypothetical returns
- Applying Principal Components Analysis
- Assessing whether historical samples cover enough different conditions
- Reduced fragility in more loosely coupled systems
Module 8
Reading credit-related market information
- Monitoring sovereign yields and interest-rate term structures for US dollar, euro, sterling and yen
- Explanations of yield curve behaviour
- Understanding the liquidity premium
- Understanding the safe-haven premium
Module 9
Spreads on investment-grade and high-yield credit
- Spreads relative to Treasuries, bunds and gilts
- SOFR, SONIA, ESTER, overnight indexed swaps (OIS) and Euro Overnight Index Average (Eonia)
- Using Option Adjusted Spreads (OAS)
- Estimating default probability from Credit Default Swap (CDS) rates
- Investor confidence indices and contrarian measures of market sentiment
Module 10
Financial statements and credit judgement
- Analysing financial statements for credit assessment
- Detailed assessment of company balance sheets, income statements and cash flows
- Effects of capitalisation, consolidation and rights issues
- Profitability, liquidity, asset turnover and gearing ratios
- Liquidity, pay-out, financial stability and operational gearing measures
- Dividend policy, Return on Equity (ROE) and Return on Capital Employed (ROCE)
- Earnings per share and historical or prospective P/E ratios
- Dividend yield, dividend and interest cover, and price-to-book measures
- Ratio methods for identifying credit stress and default
- Altman's Z score, the KMV Model and Moody's Analytics
- Ohlson distress model, Risk Metrics and McKinsey Credit Portfolio View
Module 11
Credit hedging and regulatory capital
- Mechanics of derivatives used to hedge portfolio credit risk
- Funded and unfunded single-name credit derivatives
- Basket, tranche and index-based CDS
- Regulatory capital effects of using or holding credit derivatives
- ISDA legal documentation for interest rate (IR) swaps and the Credit Support Annex (CSA)
- Basel III regulatory capital requirements
- Basel III approaches to credit risk capital charges
- Conducting stress tests with Monte Carlo Simulations
Module 12
Calculating capital for credit exposures
- Using the standardised approach
- Using the foundation internal ratings-based approach
- Using the advanced internal ratings-based approach
Module 13
CVA and managing collateral
- Defining Credit Value Adjustment (CVA)
- Credit exposure and market risk effects on derivatives
- Expected positive and worst-case exposure
- ISDA treatment of collateralisation
- Benefits of managing collateral effectively
- How collateral and netting affect CVA
- Eligible hedges and exclusion of nth-to-default structures
- Collateral in bilateral counterparty risk
- Counterparty default risk when positions are over-collateralised

Certificate

Every delegate who completes the course receives an ARUK Training Certificate of Attendance.

Frequently asked questions

How do I register?

Choose a date and city in the schedule and press Register, or send us an enquiry. Our team confirms your place and sends an invoice.

Are fees shown with VAT?

Fees are shown per delegate and exclude VAT, which is added to the invoice where applicable.

Can this course be delivered for our team only?

Yes. Any ARUK course can be delivered in-house at your premises, in a meeting room we book for you, or 1-to-1.

Is this course available online?

Yes. We run it live online with a trainer, on dates that suit your team, for £1,850 + VAT per delegate.

Is there a group discount?

Yes. 20% for 2 delegates, 35% for 3 delegates and 50% for 5 or more delegates on the same course.

Can the course be delivered in Arabic or another language?

Yes. Our courses can be delivered in English, Arabic or any European language, by a trainer who teaches in that language. Mention your preferred language when you register or enquire.

What certificate will I receive?

An ARUK Training Certificate of Attendance.

Classroom

Online (live)

Tailor this course

Course overview

Course objectives

Target competencies

Who should attend

Training methodology

Course modules

Credit risk drivers and basic measures

Using and evaluating credit ratings

Accounting treatment and capital requirements

Assessing counterparty exposure

Quantitative approaches to credit modelling

Creditworthiness of sovereign borrowers

Designing and evaluating stress tests

Reading credit-related market information

Spreads on investment-grade and high-yield credit

Financial statements and credit judgement

Credit hedging and regulatory capital

Calculating capital for credit exposures

CVA and managing collateral

Certificate

Frequently asked questions

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