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The Handbook of Credit Risk Management: Originating, Assessing, and Managing Credit Exposures


Praise for The Handbook of Credit Risk Management/p>

"Bouteillé and Coogan-Pushner successfully capture the basics of credit risk with this straightforward, easy-to-read script providing a comprehensive overview of credit instruments and modern risk practices. A recommended study for those focused upon learning the nuts and bolts of credit risk management."
—Loretta M. Hennessey, President, L. Hennessey Associates LLC, and first chair, International Association of Credit Portfolio Managers (IACPM)

The ongoing financial crisis reminds us of the relevance of sound credit risk management principles and processes. The worldwide economic downturn serves as a powerful wake-up call for company executives and financial institutions across the globe. Even simple financial transactions performed on a daily basis can create heavy losses and jeopardize the very existence of a firm.

Written for any professional involved in credit risk, The Handbook of Credit Risk Management offers a comprehensive treatment of the essential elements that define the process and principles of credit risk management. The fundamental approach of this book is that credit risk management is more than the art of assessing single name counterparties and individual transactions. In this important resource, Sylvain Bouteillé and Diane Coogan-Pushner present a comprehensive framework centered around four sequential steps: origination, credit risk assessment, portfolio management, and mitigation and transfer.

Understanding credit risk management as a discipline is more important than ever before. With this book as your guide, you'll gain valuable insights into its various aspects and how to apply this framework in real-world situations.

Sylvain Bouteillé is Head Key Account Management and a member of the management team of the North American division of Swiss Re Corporate Solutions. In 1996, he joined Swiss Re in Zurich, Switzerland, in the newly created credit risk management division. In 1998, Bouteillé moved to New York where, as U.S. Head of Credit Risk Management, he was responsible for credit risk aspects of all insurance and capital markets transactions. In 2003, he became U.S. Head of Structured Credit Underwriting, where he originated and structured credit derivatives and financial guaranty reinsurance transactions. Since 2008, Bouteillé has been working with risk managers of Fortune 500 companies to develop traditional and non-standard insurance solutions. Bouteillé holds an MS in civil engineering from ENTPE (France) and an MBA from INSEAD (France).

Diane Coogan-Pushner is Distinguished Lecturer and Director of the Graduate Program in Risk Management at Queens College, City University of New York. She began her career in financial services at the World Bank and held increasingly senior positions in finance and strategy at AT&T and PricewaterhouseCoopers. Coogan-Pushner moved to Swiss Re, and as Managing Director, originated and structured reinsurance transactions and other risk transfer solutions for insurance clients. Other credits include roles as a portfolio manager for a hedge fund and for a private equity fund both dedicated to financial services. She has served as a director for an insurer and as a member of S&P's Insurance Ratings Advisory Council, and consults to financial institutions in their asset management strategy. She received her PhD in economics from Boston University in 1992 and is a CFA charterholder.



Part I: Origination

Chapter 1: Fundamentals of Credit Risk

What is Credit Risk?

Types of Transactions that Create Credit Risk

Who is Exposed to Credit Risk?

Why Manage Credit Risk?

Chapter 2: Governance


Setting Limits

Authorizing Transactions


Final Words

Chapter 3: Checklist for Origination

Does the Transaction Fit Into My Strategy?

Does the Risk Fit into My Existing Portfolio?

Do I Understand the Credit Risk?

Does the Seller Keep an Interest in the Deal?

Are the Proper Mitigants in Place?

Is the Legal Documentation Satisfactory?

Is the Deal Priced Adequately?

Do I Have the Skills to Monitor the Exposure?

Is There an Exit Strategy?

Final Words

Part II: Credit Assessment

Chapter 4: Measurement of Credit Risk


Default Probability

The Recovery Rate

The Tenor

Direct vs. Contingent Exposure

The Expected Loss

Chapter 5: Dynamic Credit Exposure

Long-Term Supply Agreements

Derivative Products

The Economic Value of a Contract

Mark-to-Market Valuation

Value-at-Risk (VaR)

Chapter 6: Fundamental Credit Analysis

Accounting Basics

A Typical Credit Report

Agency Conflict, Incentives, and Merton’s View of Default Risk

Final Words

Chapter 7: Alternative Estimations of Credit Quality

The Evolution of an Indicator: Moody’s Analytics EDF™

Credit Default Swap Prices

Bond Prices

Final Words

Chapter 8: Securitization

Asset Securitization Overview

The Collateral

The Issuer

The Securities

Main Families of ABS

Securitization for Risk Transfer

Credit Risk Assessment of ABS

Warehousing Risk

Final Words

Part III: Portfolio Management

Chapter 9: Credit Portfolio Management

Level 1

Level 2

Level 3

Organizational Set-Up and Staffing


Final Words

Chapter 10: Economic Capital and Credit Value at Risk (CVaR)

Capital: Economic, Regulatory, Shareholder

Defining Losses: Default vs. Mark-to-Market

Credit Value at Risk or CVaR

Creating the Loss Distribution

Active Portfolio Management and CVaR


Final Words

Chapter 11: Regulation

Doing Business with a Regulated Entity

Doing Business as a Regulated Entity

How Regulation Matters: Key Regulation Directives

Final Words

Chapter 12: Accounting Implications of Credit Risk

Loan Impairment

Loan Loss Accounting

Regulatory Requirements for Loan Loss Reserves

Impairment of Debt Securities

Derecognition of Assets

Consolidation of VIEs

Accounting for Netting

Hedge Accounting

Credit Valuation Adjustments, Debit Valuation Adjustments and Own Credit Risk Adjustment


Final Words

Part IV: Mitigation and Distribution

Chapter 13: Mitigating Derivative Counterparty Credit Risk

Measurement of Counterparty Credit Risk

Mitigation of Counterparty Credit Risk through Collateralization

Legal Documentation

Dealers vs. End-Users

Bilateral Transactions vs. Central Counterparty Clearing

Prime Brokers

Repurchase Agreements

Final Words

Chapter 14: Structural Mitigation

Transactions with Corporates

Transactions with Special Purpose Vehicles

Chapter 15: Credit Insurance, Surety Bonds and Letters of Credit

Credit Insurance

Surety Bonds

Letters of Credit or LoCs

The Providers’ Point of View

Final Words

Chapter 16: Credit Derivatives

The Product

The Settlement Process

Valuation and Accounting Treatment

Uses of CDS

CDS for Credit and Price Discovery

CDS and insurance

LCDS, Indexes, MCDS and ABSCDS

Chapter 17: Collateral Debt Obligations or CDOs

What are CDOs?

Collateralized Loan Obligations or CLOs

Arbitrage CLOs

Balance Sheet CLOs


Credit Analysis of CDOs

Final Words

Chapter 18: Bankruptcy

What is Bankruptcy?

Patterns of Bankrupt Companies

Signaling Actions

Examples of Bankruptcies

Final Words


About the Authors