Includes bibliographical references.

Table of Contents

Chapter 1: Credit, Financial Markets, and Microeconomics 1
I. Introduction 1
II. The role of debt in the theory of the firm 4
III. Banking intermediation theory 13
IV. Conclusion 21
Chapter 2: External and Internal Ratings 26
I. Introduction 26
II. Ratings and external agencies 27
III. Comments and criticisms toward external ratings 32
IV. Approaching credit risk through internal ratings or score based ratings 41
V. Conclusion 50
Chapter 3: Default Risk : Quantitative Methodologies 64
I. Introduction 64
II. Assessing default risk through structural models 65
III. Credit scoring 73
IV. Conclusion 107
Chapter 4: Loss Given Default 118
I. Introduction 118
II. Some definitions 119
III. What measure of recovery should one use? 124
IV. History and determinants of recovery rates 126
V. Recovery on non traded debt 137
VI. The importance of stochastic recovery rates 140
VII. Fitting recovery functions 140
VIII. Extracting recoveries from security prices 145
IX. Conclusion 147
Chapter 5: Default Dependencies 155
I. Introduction 155
II. Correlations and other dependency measures 157
III. Default Dependencies ñ empirical findings 171
IV. Conclusion 189
Chapter 6: Credit Risk Portfolio Models 193
I. Introduction 193
II. Credit risk portfolio models: what for? 193
III. Classes of models 195
IV. Review of commercial models 196
V. Alternative approaches 215
VI. Calculating Risk Adjusted Performance measures (RAPM) 217
VII. Stress testing portfolio loss calculations 229
VIII Conclusion 231
Chapter 7: Credit Risk Management
and Strategic Capital Allocation 253
I. Introduction 253
II. Do rating agencies have a point of view on strategic capital allocation? 254
III. What is bank capital meant for? 256
IV. The various static methodologies to allocate equity capital among business units 275
V. Performance measurement, the cost of capital and dynamic equity capital allocation 278
VI. Conclusion 286
Chapter 8: Yield Spreads 288
I. Introduction 288
II. Corporate spreads 289
III. Conclusion 307
Chapter 9: Structured Products and Credit Derivatives 329
I. Introduction 329
II. Credit Derivatives 330
III. Collateralized Debt Obligations 340
IV. Conclusion 354
Chapter 10: Regulation 361
I. Introduction 361
II. A brief history of banking regulation 362
III. The principles of banking regulation 365
IV. A retrospective look at the 1988 Basle accord 370
V. Core elements of the second Basle accord 371
VI. The new Basle regulation, strengths and shortcomings 383
VII. Conclusion 388
Conclusion 389
References 391