Credit Risk Model and Basel Accords

Author: David T.
Publisher:
Publish Date: 2005-04-01
Features: The Basel Capital Accord emphasizes the ability of financial institutions to assess credit risk. In this book, two globally renowned risk management experts evaluate the Merton model and the simplified model of credit risk, and point out how to evaluate the performance of models according to the Basel Accord requirements. They use the same tests to evaluate the Basel Accord's ability to measure the safety and soundness of financial institutions. In the past one or two years, the Bank for International Settlements (BIS) has once again required major financial institutions worldwide to use complex credit risk models. Common models are generally based on Merton's (1974) risk debt model, while the new extension of the Merton risk debt model was completed by Shimko-Tejima-VanDeventer [1993], which allows for the joint analysis of credit risk and interest rate risk. However, bankers are increasingly inclined to use the new generation of so-called "simplified models of credit risk," as this model can analyze complex derivatives and track the market value of credit-adjusted loans. This book consists of 14 chapters, with the main content including: lessons from risk-adjusted shareholder value maximization; the evolution of credit model technology; the impact of macro factors on default risk; internal rating and credit model testing methods; testing credit models with historical default data; applying market data to test credit models; out-of-sample testing of credit models; the significance of Basel Accord testing and institutional management; measuring safety, soundness, and capital allocation using the Merton model and simplified models; the impact of collateral on valuation models; the pricing and valuation of revolving credit and other loan agreements; credit derivatives and structured debt collateralized bonds; and the future development of credit models. This book can serve as a textbook and important reference for faculty and students in finance and financial management programs at business schools across the country. It is also suitable for training and self-study for managers in various commercial banks, asset management companies, insurance companies, trust investment companies, securities companies, and other institutions; it can also be a must-read reference for self-learners interested in credit management.