Credit risk

About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.

Financial Risk Management for Islamic Banking and Finance

Abstract: Principles of Islamic Finance Risk Management Issues in Islamic Financial Contracts Basel II& IFSB for Islamic Financial Risk Market Risk in Islamic Finance Credit Risk in Islamic Finance Operational Risk in Islamic Finance Concluding Remarks

Global capital market interdependence and spillover effect of credit risk: Evidence from the 2007-2009 global financial crisis

Abstract: This article examines the impact of the 2007–2009 Global Financial Crisis on the interrelationships among global stock markets and the informational role of the TED spread as perceived credit risk. The current crisis originated from the dominant US market has a prompt and pervasive spillover effect into other global markets. Using the Vector Autoregressive (VAR) model, Granger causality test, cointegrating Vector Error Correction Model (VECM), we document enhanced leadership of the US market with respect to UK, Hong Kong, Japan, Australia, Russia and China markets during the crisis. Consistent with the contagion theory, the interdependence among international stock markets becomes stronger in the crisis. The TED spread serves as a leading ‘fear’ indicator and adjusts to new information rapidly during the crisis. While the impact of orthogonalized shocks from the US market on other global markets increases by at least two times during the crisis, the impact of orthogonalized shocks from the TED spread on g...

Incorporating Collateral Value Uncertainty in Loss Given Default Estimates and Loan-to-value Ratios

Abstract: We present a model of risky debt in which collateral value is correlated with the possibility of default. The model is then used to study the expected loss given default, primarily as a function of collateral. The results obtained could prove useful for estimating losses given default in many popular models of credit risk which assume them constant. We also examine the problem of determining sufficient collateral to secure a loan to a desired extent. In addition to bank practitioners, regulators might find our analysis useful in reviewing banks’ lending standards relative to current collateral values. In particular, the current proposals for The New (Basel) Capital Accord involve options for the use of banks’ own loss given default estimates which might benefit from the analysis in this paper.

Credit Default Swap Spreads and Systemic Financial Risk

Abstract: This paper presents a novel method to measure the joint default risk of large financial institutions (systemic default risk) using information in bond and credit default swap (CDS) prices. Bond prices reflect individual default probabilities of the issuers. CDS contracts, which insure against such defaults, pay o only as long as the seller of protection itself is solvent. Therefore, CDS prices contain information about the probability of joint default of both the bond issuer and the protection seller. If we consider the entire set of CDS contracts written by each financial institution against the default of each other institution we can learn about all pairwise default probabilities across the financial network. This information, however, is not sucient to completely characterize the joint distribution function of defaults of these banks. In this paper, I show how this information can be optimally aggregated to construct bounds on the probability of systemic default events. This method enables me to measure systemic default risk without making any assumptions about the joint distribution function. Two main results emerge from the empirical application of this method to the recent financial crisis. First, I show that an increase in systemic risk in large global banks did not occur until after Bear Stearns’ collapse in March 2008. Second, some of the large observed spikes in CDS spreads and bond yield spreads during this period (for example, following Lehman Brothers’ default) correspond to spikes in idiosyncratic default risk rather than systemic risk.

Directors’ and Officers’ Liability Insurance and Loan Spreads

Abstract: We analyze the effect of directors’ and officers’ liability insurance (D&O insurance) on the spreads charged on bank loans. We find that higher levels of D&O insurance coverage are associated with higher loan spreads and that this relation depends on loan characteristics in economically sensible ways and is attenuated by monitoring mechanisms. This association between loan spreads and D&O insurance coverage is robust to controlling for endogeneity (because both could be related to firm risk), including instrumental variable specifications, change regressions, and regressions using an exogenous regulatory event that increases managerial liability. Our evidence suggests that lenders view D&O insurance coverage as increasing credit risk (potentially via moral hazard or information asymmetry). Further analyses show that higher levels of D&O insurance coverage are associated with greater risk taking and higher probabilities of financial restatement due to aggressive financial reporting. While greater use of D&O insurance appears to raise the cost of debt financing, the purchase of D&O insurance might not necessarily be harmful to shareholders. We find moderate evidence that D&O insurance coverage appears to improve the value of investment in firms with better internal and external governance despite the lower returns in firms with greater use of D&O insurance.