2. KEY PROPOSITION
• THE ADVENT OF ACTIVE AND LIQUID CREDIT
TRADING WILL REQUIRE
– COMPLETE RE-ENGINEERING OF THE CREDIT
FUNCTION & PROCESS
– ALTER THE NATURE OF BANKING
FUNDAMENTALLY
3. AGENDA
• KEY DRIVERS OF CHANGE
• CREDIT RISK MANAGEMENT PARADIGMS
– CLASSICAL
– MODERN
• CREDIT RISK MANAGEMENT ARCHITECTURE
• IMPLICATIONS FOR FINANCIAL SERVICES
4. KEY DRIVERS OF CHANGE
• KEY FEATURE OF CREDIT RISK
– CENTRAL TO ALL FINANCIAL TRANSACTIONS
• TRADITIONAL VIEW OF CREDIT
– ILLIQUID
• CURRENT VIEW OF CREDIT
– LIQUID & TRADEABLE
• SHIFT FROM STATIC MANAGEMENT OF CREDIT
TO DYNAMIC MANAGEMENT OF CREDIT RISK
5. KEY DRIVERS OF CHANGE
• SHAREHOLDER VALUE ISSUES
– RETURN ON CREDIT CAPITAL
– OPTIMISATION OF RETURN ON CREDIT
CAPITAL
• CHANGES IN FINANCIAL SERVICES
– VALUE CHAIN IN FINANCIAL SERVICES
– TREND TO UNBUNDLING THE
MICROSTRUCTURE
9. KEY DRIVERS OF CHANGE
• DEVELOPMENTS IN CREDIT ENHANCEMENT
TECHNIQUES
– BI-LATERAL
– MULTILATERAL
• ADVANCES IN CREDIT/ DEFAULT RISK THEORY
• INFRASTRUCTURE DEVELOPMENTS
– SYSTEMS CAPABILITIES
10. KEY DRIVERS OF CHANGE
• CHANGE IN REGULATORY FRAMEWORK
– SHIFT TO CAPITAL BASED REGULATION
– REGULATORY ARBITRAGE
– (POSSIBILITY) OF MODEL BASED CREDIT RISK
CAPITAL
11. KEY DRIVERS OF CHANGE
• KEY NEAR TERM FACTORS
– CREDIT CAPITAL MANAGEMENT
– CREDIT PRICING
– CREDIT RISK MANAGEMENT
– REGULATORY DEVELOPMENTS
– SHIFTS IN BANKING STRATEGY
12. CREDIT RISK PARADIGMS
• TYPES
– CLASSICAL
– MODERN
• KEY ISSUE
– APPLICABILITY TO DIFFERENT MARKET
SEGMENTS
18. IMPLICATIONS OF CLASSICAL PARADIGM
• CREDIT RISK ASSUMPTION
• CREDIT PRICING
• CREDIT CAPITAL MANAGEMENT
• CREDIT RISK FOCUS
• CHANGES IN CREDIT QUALITY
• PERFORMANCE ATTRIBUTION OF ORIGINATORS
• PERFORMANCE OF CREDIT FUNCTION
19. MODERN PARADIGM
• CONCEPT
– CREDIT RISK AS A SEPARATE TRADEABLE
ASSET CLASS
– RISK MANAGED DYNAMICALLY THROUGH
HEDGING AND TRADING TOOLS
• SCHEMATIC
23. IMPLICATIONS OF MODERN PARADIGM
• CREDIT RISK ASSUMPTION
• CREDIT PRICING
• CREDIT CAPITAL MANAGEMENT
• CREDIT RISK FOCUS
• CHANGES IN CREDIT QUALITY
• PERFORMANCE ATTRIBUTION OF ORIGINATORS
• PERFORMANCE OF CREDIT FUNCTION
24. IMPLICATIONS OF MODERN PARADIGM
• CLIENT MANAGEMENT
– CORE VERSUS NON CORE CLIENTS
– HOME VERSUS FOREIGN MARKETS
25. CREDIT RISK MANAGEMENT ARCHITECTURE
• CONCEPT
– RISK MANAGEMENT SYSTEMS COMPONENTS
– INFORMATION SYSTEMS
• SCHEMATICS
26. C R E D IT R IS K M A N A G E M E N T A R C H IT E C T U R E
C R E D IT A N A L Y S IS C R E D IT P O R T F O L IO M O D E L L IN G / C R E D IT T R A D IN G
C R E D IT P R IC IN G
C R E D IT C A P IT A L M A N A G E M E N T
E C O N O M IC C A P IT A L
R E G U L A T O R Y C A P IT A L
C R E D IT E N H A N C E M E N T C R E D IT A D M IN IS T R A T IO N C R E D IT S Y S T E M S /
IT IN F R A S T R U C T U R E
27. •CREDIT EXPOSURE - STATIC & DYNAMIC (PFCE MODEL)
•DEFAULT PROBABILITY/ RATINGS MIGRATION
•RECOVERY RATES
•DEFAULT CORRELATIONS
•PORTFOLIO
RATING MODELS
MODELS
•INTERNAL CREDIT CREDIT
RISK DATA •PRICING
ANALYSIS MODELS
•EXTERNAL MODELS
TRANSACTION
DATA
CREDIT •COLLATERAL
OBLIGOR/ DATA
CREDIT •NETTING
COUNTERPARTY ENHANCEMENT •CLEARING
DATA
HOUSE
•ECONOMIC
CAPITAL
CREDIT
•REGULATORY LIMIT
CAPITAL ADMINISTRATION
CAPITAL MANAGEMENT
•PROVISIONING REPORTING
•SETTLEMENT LIMITS
•RISK LIMITS
28. IMPLICATIONS FOR FINANCIAL SERVICES
• TYPES
– MICRO(OPERATIONAL)
• REDEFINITION OF CREDIT PROCESS WITHIN
ORGANISATIONS
– MACRO(STRATEGIC)
• REDEFINITION OF BUSINESS FOCUS
30. STRATEGIC CHANGES
• THEME
– SHIFT FOCUS OF BANKS FROM HOLDER OF
RISK TO ORIGINATORS AND DISTRIBUTORS OF
RISK
• MODELS OF BANKING PRACTICE
31. MODEL 1 - CLASSICAL BANKING MODEL
LOAN TRANSACTION DEPOSIT TRANSACTION
DEPOSITOR
BORROWER BANK
BANK ORIGINATES, FUNDS, ADMINISTERS
AND RETAINS CREDIT RISK OF BORROWER
32. MODEL 2 - INVESTMENT BANKING/ SECURITIES MODEL
ISSUE OF SECURITIES DISTRIBUTION OF SECURITIES
INVESTOR
BORROWER BANK
UNDERWRITING OF PLACEMENT OF SECURITIES
AND SYNDICATION OF UNDERWRITING RISK
OTHER BANKS
BANK ORIGINATES TRANSACTION AND MAY ADMINISTER IT AS
PAYMENT AGENT. FUNDING AND CREDIT RISK OF BORROWER IS
TRANSFERRED TO INVESTOR. PRIMARY RISK IS UNDERWRITING
WHICH IS SYNDICATED TO REDUCE RISK LEVEL,
33. MODEL 3 - SECURITISATION MODEL
SALE OF LOAN BACKED
LOAN TRANSACTION
SECURITIES
SECURITISATION
BORROWER BANK INVESTOR
VEHICLE
SALE OF LOAN TO
SECURITISATION VEHICLE
BANK ORIGINATES AND ADMINISTERS THE LOAN. BANK SELLS LOAN TO
SECURITISATION VEHICLE WHICH ISSUES LOAN ASSET BACKED SECURTIES.
FUNDING AND CREDIT RISK OF BORROWER IS BORNE BY INVESTOR. BANK RISK IS
CONFINED TO CREDIT RISK PRE-SALE TO SECURITISATION VEHICLE AND ANY
UNDERWRITING RISK ON THE PLACEMENT OF THE LOAN ASSET BACKED SECURITIES
34. MODEL 4 - ECONOMIC RISK TRANSFER MODEL
LOAN TRANSACTION CREDIT DEFAULT SWAP OR
CREDIT LINKED NOTE
INVESTOR/
BORROWER BANK
OTHER BANK
BANK ORIGINATES, FUNDS AND ADMINISTERS THE LOAN. CREDIT RISK OF
BORROWER IS TRANSFERRED TO INVESTORS OR OTHER BANKS. BANK
CREDIT RISK IS PRE ECONOMIC HEDGE ONLY. WHERE A CREDIT LINKED
NOTE IS ISSUED THE INVESTOR/ OTHER BANK ALSO PROVIDES FUNDING.
35. KEY CHALLENGES
• CREDIT RISK MODELLING PROBLEMS
• DEVELOPMENT OF CREDIT TRADING
• CREDIT ENHANCEMENT PROBLEMS
• CHANGES IN CREDIT INFRASTRUCTURE
• CHANGE MANAGEMENT
36. CONCLUSIONS
• THE ADVENT OF ACTIVE AND LIQUID CREDIT
TRADING WILL REQUIRE
– COMPLETE RE-ENGINEERING OF THE CREDIT
FUNCTION & PROCESS
– ALTER THE NATURE OF BANKING
FUNDAMENTALLY
