Elsevier S & T

The Banker's Handbook on Credit Risk: Implementing Basel II

Glantz, Morton; Mun, Johnathan

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Table of contents
  • Table of contentsvii
  • Prefaceviii
  • CHAPTER 1: Basel II and Principles for the Management of Credit Risk1
  • Features of Basel II Pillar 12
  • Summary of the Second Pillar„Supervisory Review of Capital Adequacy8
  • A Summary of the Third Pillar„Market Discipline10
  • Modeling Toolkit and Basel’s Principles for the Management of Credit Risk12
  • CHAPTER 2: International Financial Reporting Standards and Basel II21
  • Scope of International Financial Reporting Standards (IFRSs)22
  • The Auditor’s Role23
  • Certified Opinions24
  • Qualified Audit25
  • Adverse Opinion25
  • Compilation25
  • Historical Cost25
  • Accounting Standards as Applied to Revenue Realization26
  • The Matching Principle26
  • Consistency27
  • Disclosure27
  • Objectivity27
  • Off-Balance-Sheet Financial Reporting28
  • Financial Instruments with Off-Balance-Sheet Risk32
  • Discretionary Items34
  • A Banker’s Guide: Uncovering Shenanigans35
  • CHAPTER 3: Decomposing Cash Flow: A Banker’s Primer39
  • Indirect Method of Cash Reporting: The Banker’s Cash Flow40
  • Direct Method of Reporting Cash41
  • Financing Activities43
  • Cash Flow Workshop50
  • Gem Furniture Company Fiscal Statements51
  • Final Points about Cash Flow Analysis62
  • Enron Cash Flow Decomposition63
  • Cash Flow Reconstruction64
  • CHAPTER 4: Step-by-Step in Getting Started with the Modeling Toolkit and Risk Simulator Software App67
  • Introduction to the Modeling Toolkit Software67
  • Introduction to Risk Simulator68
  • Running a Monte Carlo Simulation70
  • Using Forecast Charts and Confidence Intervals80
  • Correlations and Precision Control82
  • Applying Correlations in Risk Simulator83
  • The Effects of Correlations in Monte Carlo Simulation83
  • Tornado and Sensitivity Tools in Simulation85
  • Sensitivity Analysis91
  • Distributional Fitting: Single Variable and Multiple Variables95
  • Bootstrap Simulation97
  • Data Extraction, Saving Simulation Results, and Generating Reports102
  • Regression and Forecasting Diagnostic Tool103
  • Statistical Analysis Tool109
  • Distributional Analysis Tool114
  • CHAPTER 5: Analytical Forecasting and Cash Flow Projections119
  • Advanced Analytical Forecasting with Risk Simulator120
  • Different Types of Forecasting Techniques120
  • Running the Forecasting Tool in Risk Simulator122
  • Time-series Analysis122
  • Multivariate Regression125
  • Stochastic Forecasting127
  • Nonlinear Extrapolation132
  • Box-Jenkins ARIMA Advanced Time Series134
  • SensitivityŽ Financial Forecasting138
  • CHAPTER 6: Using Risk Simulator Optimization Procedures and Basel II Modeling Toolkit’s Corporate145
  • Mini Case146
  • Risk Simulator Optimization Procedures149
  • Risk Simulator Optimization Procedures Volatility and Optimization153
  • CHAPTER 7: Analytical Techniques for Modeling Probability of Default, Loss Given Default, Economic C163
  • Probability of Default164
  • Loss Given Default and Expected Losses170
  • Economic Capital and Value at Risk172
  • Hurdle Rates and Required Rate of Return184
  • CHAPTER 8: Portfolio Optimization187
  • What Is an Optimization Model?188
  • The Traveling Financial Planner189
  • The Language of Optimization190
  • Optimization Procedures190
  • CHAPTER 9: Loan Pricing and Pricing Model Construction203
  • Loan Pricing Models203
  • Stochastic Net Borrowed Funds Pricing Model204
  • Input Screen204
  • Output Screen and Yield Calculation210
  • Moving from Deterministic Pricing to Stochastic Pricing Solution212
  • CHAPTER 10: Banker’s Primer on Shareholder Value217
  • Methods to Determine Value218
  • Valuation Software228
  • CHAPTER 11: Banker’s Guide: Valuation Appraisal of Business Clients229
  • Bank Loans and Other Financing229
  • Valuation Appraisals„Documents and Information231
  • Valuation Appraisal Outline237
  • Valuation Appraisal Toolkit241
  • CHAPTER 12: Constructing Industry-Specific Credit Rating Systems245
  • The Structure of a Credit Risk Grading System248
  • Risk Rating Computer Tutorial for Risk Rating Model.xls249
  • Facility Grades257
  • Building Industry-Specific/Risk-Specific Corporate Risk Rating Models266
  • CHAPTER 13: Building Integrated Exposure Systems273
  • Strategic Planning for the Loan Portfolio274
  • GES and Loan Concentrations279
  • GES and Assessment of Capital Adequacy280
  • Liquidity Concerns281
  • Customer Relationship and Marketing281
  • GES and Disclosure to Outsiders281
  • Exception Reports282
  • Regulatory Reporting and GES282
  • GES and Reports to the Board of Directors283
  • Cross-Border Exposure Reporting284
  • Data Architecture286
  • Conclusion291
  • CHAPTER 14: Credit Risk Rating and Debt Analysis (Credit Premium and Debt Options)293
  • Illustrative Example: Credit Analysis„Credit Premium293
  • Illustrative Example: Credit Analysis„Credit Risk Analysis and Effects on Prices294
  • Illustrative Example: Credit Analysis„External Debt Ratings and Spread294
  • Illustrative Example: Credit Analysis„Internal Credit Risk Rating Model296
  • Illustrative Example: Credit Analysis„Profit-Cost Analysis of New Credit297
  • Illustrative Example: Debt Analysis„ Asset-Equity Parity Model298
  • Illustrative Example: Debt Analysis„Cox Model on Price and Yield of Risky Debt with Mean Reverting299
  • Illustrative Example: Debt Analysis„Debt Repayment and Amortization300
  • Illustrative Example: Debt Analysis„Merton Price of Risky Debt with Stochastic Asset and Interest303
  • Illustrative Example: Debt Analysis„Vasicek Debt Option Valuation304
  • Illustrative Example: Debt Analysis„Vasicek Price and Yield of Risky Debt305
  • CHAPTER 15: Interest Rate Risk, Foreign Exchange Risk, Volatility Estimation, Risk Hedging, Yield Cu307
  • Illustrative Example: Risk Analysis„Interest Rate Risk307
  • Illustrative Example: Risk Analysis„Portfolio Risk Return Profiles309
  • Illustrative Example: Risk Hedging„Delta-Gamma Hedging310
  • Illustrative Example: Risk Hedging„Delta Hedging311
  • Illustrative Example: Risk Hedging„Effects of Fixed versus Floating Rates (Swaps)312
  • Illustrative Example: Risk Hedging„Foreign Exchange Cash Flow Model312
  • Illustrative Example: Risk Hedging„Hedging Foreign Exchange Exposure315
  • Illustrative Example: Volatility„Implied Volatility317
  • Illustrative Example: Volatility„Volatility Computations317
  • Illustrative Example: Yield Curve„CIR Model325
  • Illustrative Example: Yield Curve„Curve Interpolation BIM Model326
  • Illustrative Example: Yield Curve„Curve Spline Interpolation and Extrapolation Model327
  • Illustrative Example: Yield Curve„Forward Rates from Spot Rates328
  • Illustrative Example: Yield Curve„Term Structure of Volatility329
  • Illustrative Example: Yield Curve„U.S. Treasury Risk-free Rates329
  • Illustrative Example: Yield Curve„Vasicek Model332
  • Illustrative Example: Stochastic Forecasting of Interest Rates and Stock Prices335
  • Illustrative Example: Econometric Forecasting using Box-Jenkins ARIMA337
  • Illustrative Example: Time-Series Forecasting338
  • CHAPTER 16: Exotic Options and Credit Derivatives343
  • Illustrative Example: Exotic Options„Accruals on Basket of Assets345
  • Illustrative Example: Exotic Options„American Call Option on Foreign Exchange346
  • Illustrative Example: Exotic Options„Barrier Options347
  • Illustrative Example: Exotic Options„Binary Digital Options348
  • Illustrative Example: Exotic Options„Commodity Options349
  • Illustrative Example: Exotic Options„Currency (Foreign Exchange) Options350
  • Illustrative Example: Exotic Options„Extreme Spreads Option351
  • Illustrative Example: Exotic Options„Foreign Equity Linked Foreign Exchange Options in Domestic Cu352
  • Illustrative Example: Exotic Options„Foreign Equity Struck in Domestic Currency353
  • Illustrative Example: Exotic Options„Foreign Equity with Fixed Exchange Rate353
  • Illustrative Example: Exotic Options„Perpetual Options354
  • Illustrative Example: Exotic Options„Range Accruals (Fairway Options)354
  • Illustrative Example: Options Analysis„Binary Digital Instruments355
  • Illustrative Example: Options Analysis„Options Trading Strategies362
  • Illustrative Example: Options Analysis„Five Plain Vanilla Options365
  • Appendix 1: Getting Started with Real Options SLS Software Application on Modeling Customizable Exot373
  • Single-Asset and Single-Phased Module375
  • Multiple-Asset or Multiple-Phased SLS Module382
  • Multinomial SLS Module383
  • SLS Excel Solution Module386
  • SLS Excel Functions Module387
  • SLS Excel Lattice Maker Module389
  • Appendix 2: Measuring Default Probability: A Practical Approach392
  • Estimate Asset Value and Volatility393
  • Calculate the Distance-to-Default396
  • Calculate the Default Probability397
  • Appendix 3: Server Based Applications for Running Data Intensive Basel II Credit and Market Risk Mod399
  • System Architecture400
  • Rov Risk Modeler401
  • Rov Risk Valuator409
  • Index413
Book details
  • Vendor Elsevier S & T
  • SKU 9780123736666
  • ISBN-13 9780080570051
  • Author Glantz, Morton; Mun, Johnathan
  • Category Business & Economics
  • Subject Banks & Banking

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The Banker's Handbook on Credit Risk shows you how to comply with Basel II regulations on credit risk step by step, building on the basics in credit risk up to advanced credit risk methodologies. This advanced credit/risk management book takes a "new tools" approach to Basel II implementation. The hands-on applications covered in this book are vast, including areas of Basel II banking risk requirements (credit risk, credit spreads, default risk, value at risk, market risk, and so forth) and financial analysis (exotic options and valuation), to risk analysis (stochastic forecasting, risk-based Monte Carlo simulation, portfolio optimization) and real options analysis (strategic options and decision analysis). This book is targeted at banking practitioners and financial analysts who require the algorithms, examples, models, and insights in solving more advanced and even esoteric problems.
The book comes complete with a DVD filled with sample modeling videos, case studies, and software applications to help the reader get started immediately. The various trial software applications included allows the reader to quickly access the approximately 670 modeling functions, 250 analytical model templates, and powerful risk-based simulation software to help in the understanding and learning of the concepts covered in the book, and also to use the embedded functions and algorithms in their own models. In addition, the reader can get started quickly in running risk-based Monte Carlo simulations, run advanced forecasting methods, and perform optimization on a myriad of situations, as well as structure and solve customized real options and financial options problems.

* Only book to show bankers step by step how to comply with Basel II regulations on credit risk
* Over 150 hands-on software applications included on the DVD accompanying the book, including sample modeling videos
* Provides all the latest quantitative tools