The years preceding the 2007-2008 financial crisis were characterized by a dramatic increase in systemic risk to the financial system, caused in large part by a shift away from the traditional banking model. Rather than holding loans to maturity, banks moved to an underwriting model in which they originated loans and then quickly sold them, shifting risk to other parties in the financial system. The result was a deterioration in credit quality at the same time as there was a dramatic increase in consumer and corporate leverage, which were not detected by regulators. The combination of the two permitted an undetected build-up of risk in the financial system that created the pre-conditions for the subsequent crisis. But adoption of early warning systems that accurately measure credit risk exposure might have alerted all parties in time for them to take action to manage their risk exposure. That is the role of the credit measurement models surveyed in this book.
In this newly updated Third Edition of Credit Risk Measurement In and Out of the Financial Crisis, Anthony Saunders and Linda Allen discuss all of the latest credit risk measurement and modeling techniques. Professors Saunders and Allen examine how these new models approach the evaluation of individual borrower and portfolio credit risk exposure, as well as the development of derivative contracts to manage credit risk exposure. Some of the alternative models they cover include: loans as options (the KMV and Moody's models), intensity-based models such as Kamakura's Risk Manager, the VaR approach (including CreditMetrics and other models), RAROC models, credit scoring systems, mortality rate systems, and others. In addition, the authors examine the BIS proposals for the New Basel Capital Accord, updated to 2006.
The art and science of credit risk measurement is the single most important topic in finance today. With its comprehensive coverage, summary, and comparison of new approaches, this reliable resource provides you with the best guidance available. Its clear explanations of often complex material will make Credit Risk Measurement In and Out of the Financial Crisis an indispensable resource for bankers, economists, regulators, academics, and students.
Credit Risk Measurement In and Out of the Financial Crisis
A newly revised edition of a classic work on credit risk measurement
Credit Risk Measurement In and Out of the Financial Crisis dissects the 2007-2008 credit crisis and provides solutions for professionals looking to better manage risk through modeling and new technology.
In this update to their well-received Credit Risk Measurement: New Approaches to Value at Risk and Other Paradigms, authors Anthony Saunders and Linda Allen address all the implications of new regulations and how the new rules will change everyday activity in the finance industry. They provide techniques for modeling--credit scoring, structural default prediction models, and reduced form models--while offering sound advice for stress testing credit risk models. They also examine credit derivatives--a key factor in the global financial crisis of 2007-2009--and discuss mechanisms for measuring and managing their risk exposures. Perhaps most importantly, they discuss proposals for restructuring the financial system so as to prevent the recurrence of similar crises in the future.
Understanding credit risk measurement is now more important than ever. Credit Risk Measurement In and Out of the Financial Crisis will solidify your knowledge of this dynamic discipline.