This course is beneficial for banking personnel in all areas of credit risk.  Others who will benefit include, but are not limited to, asset allocators, portfolio strategists, sovereign wealth fund managers and research staff, risk managers/controllers, private investors and senior back-office personnel. The course is also valuable for those interested in credit modelling and those engaged in compliance with all applicable regulations regarding credit risk in financial institutions.

This Credit Risk Assessment course gives participants a comprehensive overview of the key concepts and methodologies in understanding the drivers of credit risk, modelling tools used for the measurement of credit risk, and current best practice in credit risk management techniques.

The course focuses on the actual practice of credit risk assessment within financial institutions as well as on the quantitative and methodological tools and procedures that are at the cutting edge of measuring, mitigating and managing credit risk.

Treatment of credit risk has shifted greatly since the global financial crisis of 2008. Prior to then, it was considered almost inconceivable that major investment banks and global insurers could default and create a systemic credit and liquidity crisis. Since the crisis there has been a universal re-thinking of most aspects of legacy risk management techniques. Financial regulators and the Basel Committee on Banking Supervision have placed significant emphasis on the need for innovative and more robust methods of modelling financial stress and the kinds of credit market deterioration that was witnessed during the crisis.

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

• Identify the key elements of credit risk
• Analyze the micro-financial drivers of credit risk and macro-economic factors which impact system-wide credit risk
• Explain modelling techniques for assessing credit risk
• Demonstrate proficiency with different methods and tools for credit scoring
• Demonstrate the usage and risks of credit derivatives
• Apply collateral management techniques to credit derivatives exposures

Module One  - Fundamentals of Credit Risk

·         The key macro and micro-financial concepts behind, and drivers of, credit risk

·         Measurement of credit risk and adverse outcomes

·         Assessing credit risk and default probability of loan portfolios

·         Key determinants for managing credit risk:

·         Credit migration and transition matrices

·         Fundamental analysis of financial statements, key ratios, qualitative characteristics of the balance sheet

·         Off-balance sheet and contingent credit risk

·         Market-based approaches, bond spreads, swap rates

·         Counterparty credit risk

·         Credit scoring, credit risk modelling, risk profiling and assessing creditworthiness

Module Two - Credit Ratings Methodologies and Application

·         Review of rating classifications systems of the major Credit Rating Agencies (CRAs)

·         The principal credit rating agencies – Moody’s, Standard & Poor’s, Fitch

·         Overview of the rating methodologies – issuer analysis, historical data, business cycles

·         Commercial paper ratings

·         Sovereign ratings – approach to developed markets and emerging markets

·         Conflicts of interest - representing credit issuers but designed to protect credit purchasers

Module Three - Capital Charges and Accounting Principles

·         Review of the distinction between the banking book and the trading book

·         Basel III attempts to address regulatory arbitrage

·         Treatment of securitizations and off-balance-sheet exposures

·         Available for Sale issues – impacts on liquidity, high-quality liquid assets (HQLA), the rigidity of balance sheets

·         Detailed examination of IFRS 9 – implementation timetable, further revisions?

·         Recognition of expected losses and early warning of asset impairment

·         Amortized cost – held to maturity requirements

·         Fair value through other comprehensive income (FVOCI)

·         Fair value through profit or loss (FVPL)

Module Four - Counter-Party Credit Risk                                          

·         Examine the various facets of credit risk which hinges on losses sustained from the failure of an obligor to honour contractual obligations

·         Distinguish the separate components of credit risk:

·         Probability of default by obligor – how reliably can it be estimated?

·         Probability of downgrade or widening credit spreads of counterparty

·         Recovery rate – what percentage of obligation can be recovered after default?

·         Credit exposure – estimating loss magnitude about capital buffers

Module Five - Measuring Credit Risk and Techniques for Credit Risk Modelling

·         Credit Metrics, credit scoring and credit rating systems

·         Quantitative modelling of credit risk using stochastic processes

·         Estimating the probability of default – KMV Model, distance to default techniques

·         Explain how debt and equity can be understood as options on the firm

·         Techniques for the modelling default risk of CDO’s, CMO’s and other structured vehicles

·         Lessons from SIVs and other off-balance sheet financing on credit risk management