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1、AdvancedCreditRiskAnalysisandManagement.CibyJoseph.©2013CibyJoseph.Published2013byJohnWiley&Sons,Ltd.2EssentialsofCreditRiskAnalysisCreditriskexistswheneveraproductorserviceisobtainedwithoutpayingforit.Inthebusinesssector,creditriskispervasive.Householdsalsousecreditexte
2、nsively.Forinstance,individu-als/householdswhoareelectricityconsumers,telephoneusersandcreditcardholdersexposerespectivesupplierstocreditrisks.Similarly,personsplacingdepositswithbanks/financingcompaniesarealsoexposedtocreditrisk.2.1MEANINGOFCREDITRISKCreditriskcanbedefi
3、nedasfollows:‘Creditriskreferstotheprobabilityoftheloss(duetothenon-recoveryof)emanatingfromthecreditextendedasaresultofthenon-fulfilmentofcontractualobligationsarisingfromunwillingnessorinabilityofthecounterpartyorforanyotherreason.’Iftheprobabilityofthelossishigh,thecr
4、editriskinvolvedisalsohighandviceversa.Thestudyofcreditriskcanbesplitintotwo,whichfacilitatesbetterunderstandingoftheterm(seeFigure2.1).Asingleborrower/obligorexposureisgenerallyknownasFirmCreditRiskorObligorCreditRiskwhilethecreditexposuretoagroupofborrowers,iscalledPor
5、tfolioCreditRisk.Thisbifurcationisimportantfortheproperunderstandingandmanagementofcreditrisk,inasmuchastheultimatereasonsforfailuretopaycanbetracedtotheeconomic,industryorcustomerspecificfactors.Aswewillseeinlaterchapters,whileobligorriskdecidesthefateoftheoverallportfo
6、lio,portfolioriskhasdifferentdynamicsandplaysacrucialroleindeterminingthequantumofeconomiccapitalrequired,whichisafunctionofexpectedcreditloss.Uptonow,welookedatcreditriskassumingthatbothobligorandcreditorarelocatedinthesamecountry.Institutionsengagedincross-countrycredi
7、ttransactionswouldarguethatcreditriskgoesbeyondthecustomaryviewof‘defaulttorepaytheprincipalandinterest’.Insuchcasesthecreditriskmaymanifestitselfinsubtlydifferentways,dependingonthefinancialtransactioninquestion,anditisusefultodistinguishbetweenthethreeaspects:(i)Settle
8、mentriskariseswhentheconduitthroughwhichthepaymentischannelledfailstopay.Forinstance,sometimesthemoneys
