Credit Risk Evaluation : Modeling - Analysis - Management

Abstract

An analysis and further development of the building blocks of modern credit risk management: -Definitions of default -Estimation of default probabilities -Exposures -Recovery Rates -Pricing -Concepts of portfolio dependence -Time horizons for risk calculations -Quantification of portfolio risk -Estimation of risk measures -Portfolio analysis and portfolio improvement -Evaluation and comparison of credit risk models -Analytic portfolio loss distributions The thesis contributes to the evaluation and development of credit risk management methods. First, it offers an in-depth analysis of the well-known credit risk models Credit Metrics (JP Morgan), Credit Risk+ (Credit Suisse First Boston), Credit Portfolio View (McKinsey & Company) and the Vasicek-Kealhofer-model (KMV Corporation). Second, we develop the Credit Risk Evaluation model as an alternative risk model that overcomes a variety of deficiencies of the existing approaches. Third, we provide a series of new results about homogenous portfolios in Credit Metrics, the KMV model and the CRE model that allow to better understand and compare the models and to see the impact of modeling assumptions on the reported portfolio risk. Fourth, the thesis covers all methodological steps that are necessary to quantify, to analyze and to improve the credit risk and the risk adjusted return of a bank portfolio. Conceptually, the work follows the risk management process that comprises three major aspects: the modeling process of the credit risk from the individual client to the portfolio (the qualitative aspect), the quantification of portfolio risk and risk contributions to portfolio risk as well as the analysis of portfolio risk structures (the quantitative aspect), and, finally, methods to improve portfolio risk and its risk adjusted profitability (the management aspect).