Topic
Credit risk
About: Credit risk is a research topic. Over the lifetime, 18595 publications have been published within this topic receiving 382866 citations.
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TL;DR: In this paper, a framework for studying the role of recovery on defaultable debt prices is presented, for a wide class of processes describing recovery rates and default probability, which can be used to invert the market expectation of recovery rates implicit in bond prices.
Abstract: This article presents a framework for studying the role of recovery on defaultable debt prices (for a wide class of processes describing recovery rates and default probability). These debt models have the ability to differentiate the impact of recovery rates and default probability, and can be utilized to invert the market expectation of recovery rates implicit in bond prices. Empirical implementation of these models suggests two central findings. First, the recovery concept that specifies recovery as a fraction of the discounted par value has broader empirical support. Second, parametric debt valuation models can provide a useful assessment of recovery rates embedded in bond prices. This article has attempted to model recovery and comprehend their impact on debt values.
158 citations
Patent•
27 Oct 2010
TL;DR: In this article, an automated loan risk assessment system and method is described, which is adapted to receive information about a loan or an insurance application requesting insurance to cover the same, and calculates a risk score for the loan based on a plurality of risk factors including at least two of a fraud risk factor, a credit risk factor and a property valuation risk factor.
Abstract: An automated loan risk assessment system and method are described. The system is adapted to receive information about a loan or an insurance application requesting insurance to cover same. The system calculates a risk score for the loan based on a plurality of risk factors including at least two of a fraud risk factor, a credit risk factor and a property valuation risk factor. The risk score can be used by a loan service provider in deciding whether or not to fund or insure the loan.
157 citations
TL;DR: In this article, the authors describe and contrast three dierent measures of an institution's credit risk: total credit risk, insolvency risk, and illiquidity risk, i.e., the probability of a default due to a run when the institution would otherwise have been solvent.
Abstract: We describe and contrast three dierent measures of an institu- tion's credit risk. \Insolvency risk" is the conditional probability of default due to deterioration of asset quality if there is no run by short term creditors. \Total credit risk" is the unconditional probability of default, either because of a (short term) creditor run or (long run) asset insolvency. \Illiquidity risk" is the dierence between the two, i.e., the probability of a default due to a run when the institution would otherwise have been solvent. We discuss how the three kinds of risk vary with balance sheet composition. We provide a formula for illiquidity risk and show that it is (i) decreasing in the \liquidity ratio" - the ratio of realizable cash on the balance sheet to short term liabilities; (ii) increasing in the \outside option ratio" - a measure of the opportunity cost of the funds used to roll over short term liabil- ities; and (iii) increasing in the \fundamental risk ratio" - a measure of ex post variance of the asset portfolio.
157 citations
Posted Content•
TL;DR: In this paper, the authors investigate bank capital, charter value, off-balance sheet activities, dividend payout ratio and size as determinants of bank equity risk (systematic risk, total risk, interest rate risk and idiosyncratic risk) and credit risk.
Abstract: We investigate bank capital, charter value, off-balance sheet activities, dividend payout ratio and size as determinants of bank equity risk (systematic risk, total risk, interest rate risk and idiosyncratic risk) and credit risk. Using information for 117 financial institutions across 15 European countries over the period 1996-2010, we find evidence of a convex (U-shaped) relation between bank capital and bank systematic risk and credit risk. We find mixed evidence on the relation between charter value and our measures of bank risk. The results also show a positive association between off-balance sheet activities and bank risk. It is also evident that dividend payout ratio is negatively related to all risk measures. We find large banks reflect higher total risk and lower credit risk. Following the creation of the Economic Monetary Union, we also observe an increase in bank risk sensitivity to both bank capital and off-balance sheet activities and a decrease in the sensitivity of bank risk to charter value. Finally, with regard to the impact of the recent global financial crisis, we find that the largest decline in the coefficient value is observed for bank capital relative to credit risk. These results are robust to various model specifications.
157 citations
Book•
01 Jan 2008
TL;DR: In this article, the authors present a framework for measuring risk in financial institutions using a return on equity (ROE) framework, based on the Black-Scholes option pricing model.
Abstract: Part I Introduction Ch. 1 Why Are Financial Institutions Special? Appendix 1A The Financial Crisis: The Failure of Financial Services Institution Specialness (online) Appendix 1B Monetary Policy Tools (online) Ch. 2 Financial Services: Depository Institutions Appendix 2A Financial Statement Analysis Using a Return on Equity (ROE) Framework (online) Appendix 2B Commercial Banks' Financial Statements and Analysis (online) Appendix 2C Depository Institutions and Their Regulators (online) Appendix 2D Technology in Commercial Banking (online) Ch. 3 Financial Services: Finance Companies Ch. 4 Financial Services: Securities Brokerage and Investment Banking Ch. 5 Financial Services: Mutual Funds and Hedge Funds Ch. 6 Financial Services: Insurance Ch. 7 Risks of Financial Institutions Part II Measuring Risk Ch. 8 Interest Rate Risk I Appendix 8A The Maturity Model (online) Appendix 8B Term Structure of Interest Rates Ch. 9 Interest Rate Risk II Appendix 9A The Basics of Bond Valuation (online) Appendix 9B Incorporating Convexity into the Duration Model Ch. 10 Credit Risk: Individual Loan Risk Appendix 10A Credit Analysis (online) Appendix 10B Black-Scholes Option Pricing Model (online) Ch. 11 Credit Risk: Loan Portfolio and Concentration Risk Appendix 11A CreditMetrics Appendix 11B CreditRisk+ Ch. 12 Liquidity Risk Appendix 12A Sources and Uses of Funds Statement, Bank of America, March 2012 (online) Ch. 13 Foreign Exchange Risk Ch. 14 Sovereign Risk Appendix 14A Mechanisms for Dealing with Sovereign Risk Exposure Ch. 15 Market Risk Ch. 16 Off-Balance-Sheet Risk Appendix 16A A Letter of Credit Transaction (online) Ch. 17 Technology and Other Operational Risks Part III Managing Risk Ch. 18 Liability and Liquidity Management Appendix 18A Federal Reserve Requirement Accounting (online) Appendix 18B Bankers Acceptances and Commercial Paper as Sources of Financing (online) Ch. 19 Deposit Insurance and Other Liability Guarantees Appendix 19A Calculation of Deposit Insurance Premiums Appendix 19B FDIC Press Releases of Bank Failures (online) Appendix 19C Deposit Insurance Coverage for Commercial Banks in Various Countries (online) Ch. 20 Capital Adequacy Appendix 20A Internal Ratings-Based Approach to Measuring Credit Risk-Adjusted Assets Appendix 20B Methodology Used to Determine G-SIBs Capital Surcharge (online) Ch. 21 Product and Geographic Expansion Appendix 21A EU and G-10 Countries: Regulatory Treatment of the Mixing of Banking, Securities, and Insurance Activities and the Mixing of Banking and Commerce (online) Ch. 22 Futures and Forwards Appendix 22A Microhedging with Futures (online) Ch. 23 Options, Caps, Floors, and Collars Appendix 23A Black-Scholes Option Pricing Model (online) Appendix 23B Microhedging with Options (online) Ch. 24 Swaps Appendix 24A Setting Rates on an Interest Rate Swap Ch. 25 Loan Sales Ch. 26 Securitization Appendix 26A Fannie Mae and Freddie Mac Balance Sheets (online)
157 citations