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Credit Portfolio Management Old Challenges and New Opportunities

Credit Portfolio Management Old Challenges and New Opportunities. Randy Miller. Senior Vice President, Global Portfolio Strategies. UNCC October 18, 2013. Old CPM Challenges. Credit Risk Still the Primary Challenge Longer tenors Lack of liquidity Concentrated balance sheets

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Credit Portfolio Management Old Challenges and New Opportunities

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  1. Credit Portfolio ManagementOld Challenges and New Opportunities Randy Miller Senior Vice President, Global Portfolio Strategies UNCC October 18, 2013

  2. Old CPM Challenges • Credit Risk Still the Primary Challenge • Longer tenors • Lack of liquidity • Concentrated balance sheets • Systematic and nonsystematic correlations • It’s a Competitive Customer Service Business • A relationship business – micro vs macro • My loan is unique • The market (i.e., my competition) made me do it • Portfolio Management • The portfolio you are given versus the portfolio you want • Management through the rear view mirror • It’s tough to diversify • Risk appetite versus the business plan • Credit Organizations • Business, Finance, and Risk on the same page? • Incentives that support a post-cyclical bias

  3. New Opportunities • Credit Risk Still the Main Risk • Forward-looking and nimble credit policies and practices • Evaluate for longer horizons at the loan and portfolio levels • Know your primary risk drivers (Client Selection-Structure vs correlation) • Identify emerging risks and returns – Statistics matter, but not always • It’s a Competitive Customer Service Business • Have the discipline to adjust or say no. • Segment and price for standardized vs specialized product • A disciplined market leader not a follower • Portfolio Management • Manage strategically to the portfolio you want • Forward-looking management • Diversify where possible, but focus on client selection and structure • Know and measure your risk appetite and develop appropriate business plans • Discipline to trade-off additional upside for longer term stability • Credit Organizations • Risk appetite and business plan integration • Retail vs wholesale business models • Incentives that support a pre-cyclical bias

  4. Quantitative Opportunities • Credit Risk Still the Main Risk • Multi-year default probabilities • Variability of loss severity • Market-based hedge strategies (single name, portfolio) • Evaluate the basis risk • Emerging risk indicators • It’s a Competitive Customer Service Business • Product performance and pricing analysis • Can you compete on price? Price elasticity. • Portfolio Management • Multi-year horizon analysis • Scenario-based analysis and stress testing • Contagion risk versus correlation risk • Financial capital, economic capital, and regulatory capital • Credit Organizations • Identify key performance measurement metrics • Enterprise analytics – integrated retail and wholesale models • How to tie compensation to metrics?

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