Credit Risk Management in Banking:

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??????????
Credit Risk Management in Banking A Modern
Perspective
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Chapter 1???????????????
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??Summary

• Sources of credit risk taking Citigroup as
  example
• Inquiry of influencing determinants 6 aspects

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??Definition

• Credit risk is the potential of financial loss
  resulting from the failure of a borrower or
  counterparty to honor its financial or
  contractual obligations.
• A Definition by Citigroup

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??Sources of credit risk

• Citigroup as example5?? 2005
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• ??????????????
• ?????????????????????????,? 100 ???????,?????????
  100 ??
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• ??????????(Dow Jones Sustainability World Index)
  ??FTSE4Good ???(FTSE4GoodIndex)????

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1?risk management functions

• Senior Risk Officer is responsible for
• establishing standards for the measurement and
  reporting of risk,
• managing and compensating the senior independent
  risk managers at the business level,
• approving business-level risk management
  policies,
• reviewing major risk exposures and concentrations
  across the organization.
• The independent risk managers at the business
  level
• responsible for establishing and implementing
  risk management policies and practices within
  their business,
• for overseeing the risk in their business, and
  for
• responding to the needs and issues of their
  business.

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2?RISK CAPITAL

• Risk capital
• the amount of capital required to absorb
  potential unexpected economic losses resulting
  from extremely severe events over a one-year time
  period.

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• drivers of economic losses
• Credit risk losses primarily result from a
  borrowers or counterpartys inability to meet
  its obligations.
• Market risk losses arise from fluctuations in the
  market value of trading and non-trading
  positions, including changes in value resulting
  from fluctuation in rates.
• Operational risk losses result from inadequate or
  failed internal processes, people, systems or
  from external events.
• Insurance risks arise from unexpectedly high
  payouts on insurance liabilities.

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(1) Reduction in risk represents diversification
between risk sectors.
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3?Credit risk arises in

• lending
• sales and trading
• derivatives
• securities transactions
• settlement
• and when the Company acts as an intermediary on
  behalf of its clients and other third parties

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4?Loans
Consumer Credit 90 Days or More Past Due In
millions of dollars at December 31
Corporate Credit Cash-Basis Loans In millions of
dollars at December 31
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CASH-BASIS, RENEGOTIATED, AND PAST DUE LOANS
Citigroup ??????????????????? (1)cash-basis
??????????????????????? (2)renegotiated
????????????? (3)past due ????,??????????
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5?Allowance for loan losses
???????????DOC??
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6?Credit Risk Mitigation(??)

• uses credit derivatives and other risk mitigants
  to hedge portions of the credit risk in its
  portfolio, in addition to outright asset sales.
• effect of these transactions is to transfer
  credit risk to credit-worthy, independent third
  parties.
• Beginning in the fourth quarter of 2003, the
  results of the mark-to-market and any realized
  gains or losses on credit derivatives are
  reflected in the Principal Transactions line on
  the Consolidated Statement of Income.

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• At December 31, 2005 and 2004, 40.7 billion and
  27.3 billion, respectively, of credit risk
  exposure was economically hedged.

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60?58
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7?Credit Exposure Arising from Derivatives

• Credit risk is the exposure to loss in the event
  of nonperformance by the other party to the
  transaction where the value of any collateral
  held is not adequate to cover such losses.

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• credit exposure on derivatives and foreign
  exchange contracts is primarily to professional
  counterparties in the financial sector, with 79
  arising from transactions with banks, investments
  banks, governments and central banks, and other
  financial institutions.
• Managingmeasures and monitors credit exposure
  taking into account the current mark-to-market
  value of each contract plus a prudent estimate of
  its potential change in value over its life.
• This measurement of the potential future exposure
  for each credit facility is based on a stressed
  simulation of market rates and generally takes
  into account legally enforceable risk-mitigating
  agreements for each obligor such as netting and
  margining.

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8?Concentration of credit risk

• Concentrations of credit risk exist when changes
  in economic, industry or geographic factors
  similarly affect groups of counterparties whose
  aggregate credit exposure is material in relation
  to Citigroups total credit exposure.
• portfolio of financial instruments is broadly
  diversified along industry, product, and
  geographic lines, material transactions are
  completed with other financial institutions,
  particularly in the securitiestrading,
  derivatives, and foreign exchange businesses.

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• limit exposure to any one geographic region,
  country or individual creditor and monitors on a
  continuous basis.
• most significant concentration of credit risk was
  with the U.S. government and its agencies.
• primarily results from trading assets and
  investments issued by the U.S. government and its
  agencies, amounted to 78.0 billion and 88.1
  billion at December 31, 2005 and 2004.
• next largest exposure is to the Mexican
  government and its agencies, which are rated
  investment grade by both Moodys and SP.
  amounted to 20.7 billion and 23.8 billion at
  December 31, 2005 and 2004
• composed of investment securities, loans, and
  trading assets.

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???????????(?)

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  ?????????????????

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• Basel??
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• ??
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• ???
• ??(guarantee)???????????
• ??(acceptance)????,??????????????????
• ??????(transactions with recourse)??????????????
  ??,????????????????????

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• ?????(standby letters of credit)????????,???????
  ?????????,???????????????????????SLC???????,?????
  ????????????
• ?????(documentary letters of credit)????????????
  ?????
• ??????????(warranties, indemnities and
  performance bonds)?????????????????????

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??(???)?????????
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• ??(commitment)
• ????????????????????
• Adverse in accruing of credit risk exposure
• Commitment with recourse or without recourse
• ?????????(asset sale and repurchase
  agreement)????????????????????,??????????????????
  ?
• ??????(outright forward purchase)????????????????
  ??????????

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• ??????(forward-forward deposit)?????????????????
  ???,????????????????
• ??????????(partial-paid shares and
  securities)???,????????????????????,?????????????
  ????????????????
• ??????(standby facility)????????,???????????,????
  ????
• ??????(note issuance facility)???????(revolving
  underwriting facility)????

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• ???????????3???6?????,?????????????????????????
  ?????????????????????????????,??,????????????????
• ??????????(credit line)?????????(undrawn
  overdraft facilities)?????????????????,????????,?
  ??????????????????????????,???????????

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??(???)?????????
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• ????????????(CCF)credit conversion factor
• II.A.13 Paragraph. 8289(2004/6 CP)with 1988
  accord specification

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• ????????
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• ????????????????,????????????????????????????,5???
  ?????????????????????????(14???????????????????)
• ????

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??six key questions

• P. Jackson W. Perraudin 1999/10
• (i) What is the relative riskiness of credit
  exposures across different maturities?
• (ii) Does the nature of credit risk vary across
  different countries?
• (iii) Do credit exposures with the same rating
  behave differently depending on the type of
  borrower(sovereign versus non-sovereign, bank
  versus industrial or utility)?
• (iv) Do credit risk models successfully track
  risks associated with credit portfolios?
• (v) Are ratings by agencies such as Moodys or
  Standard Poors reliable?
• (vi) Does the credit risk of loans differ from
  that of bonds?

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• Does the riskiness of credit exposures depend on
  maturity?
• whether there is a significant maturity structure
  to credit risk and in particular whether
  shorter-maturity exposures should carry less
  capital than longer-maturity exposures.
• reasonable measure the credit spread times the
  maturity of the exposure