1 / 11

Credit Risk: Loan Portfolio and Concentration Risk: Chapter 12

Credit Risk: Loan Portfolio and Concentration Risk: Chapter 12. Financial Institutions Management, 3/e By Anthony Saunders. Simple Models of Loan Concentration. Migration analysis Track credit rating changes within sector or pool of loans. Rating transition matrix. Rating Transition Matrix .

lance
Download Presentation

Credit Risk: Loan Portfolio and Concentration Risk: Chapter 12

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Credit Risk: Loan Portfolio and Concentration Risk: Chapter 12 Financial Institutions Management, 3/e By Anthony Saunders

  2. Simple Models of Loan Concentration • Migration analysis • Track credit rating changes within sector or pool of loans. • Rating transition matrix.

  3. Rating Transition Matrix Risk grade: end of year 1 2 3 Default Risk grade: 1| .85 .10 .04 .01 beginning 2| .12 .83 .03 .02 of year 3| .03 .13 .80 .04

  4. Simple Models of Loan Concentration • Concentration limits • On loans to individual borrower. • Concentration limit = Maximum loss  Loss rate. • Maximum loss expressed as percent of capital.

  5. Diversification and Modern Portfolio Theory • Applying portfolio theory to loans • Using loans to construct the efficient frontier. • Minimum risk portfolio. • Low risk • Low return.

  6. Applying Portfolio Theory to Loans • Require • (i) expected return on loan(measured by all-in-spread); • (ii) loan risk; • (iii) correlation of loan default risks.

  7. KMV Portfolio Manager Model • Ri = AISi - E(Li) = AISi - [EDFi × LGDi] • si = ULi = si × LGDi = [EDFi(1-EDFi)]½ × LGDi • rij = correlation between systematic return components of equity returns of borrower i and borrower j.

  8. Partial Applications of Portfolio Theory • Loan volume-based models • Commercial bank call reports • Can be aggregated to estimate national allocations. • Shared national credit • National database that breaks commercial and industrial loan volume into 2-digit SIC codes.

  9. Partial Applications • Loan volume-based models (continued) • Provide market benchmarks. • Standard deviation measure of loan allocation deviation.

  10. Loan Loss Ratio-Based Models • Estimate loan loss risk by SIC sector. • Time-series regression: [sectoral losses in ithsector] [ loans to ith sector ] = a + bi [total loan losses] [ total loans ]

  11. Regulatory Models • Credit concentration risk evaluation largely subjective. • Life and PC insurance regulators propose limits on investments in securities or obligations of any single issuer. • Diversification limits.

More Related