Credit Portfolio Risk Management

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Course Features

  • Course date:03/26/2020
  • Course Duration: 2 Day
  • Level: Beginner-intermediate
  • Prerequisites: None
  • Method: Live & Virtual
  • Venue: 115 Broadway, NY, NY 10006
  • Time: 9:00 am – 5:00 pm
  • Dress Code: Business Casual
  • Category:
  • Certificate: Yes
  • CPE Credits: 14
  • Course Code: 114

Credit Portfolio Risk Management

This course addresses the significant developments in recent years that have been brought to bear on the management of credit risk borne by financial services firms, particularly banks.  Factors such as deregulation and technology have increased the magnitude and complexity of the credit risks faced by major players in the credit markets and raised questions about the adequacy of the capital held by these firms as a buffer against credit loss.

Prompted by the concerns of regulators, shareholders, and customers, a growing number of financial firms have begun to employ the concepts and techniques of modern portfolio theory to the management of credit portfolios.  This credit portfolio management methodology takes into account the effects of correlation and diversification to analyze and manage a credit portfolio and contribute to effective, if not quite optimum, use of the firm’s capital.  The course focuses on these portfolio management techniques and examines several of the models and techniques embodying these concepts that have developed in the marketplace.  It also considers how credit derivatives and other risk mitigation techniques are used in the implementation of a credit portfolio risk management program.

There is also a discussion of the relationship of credit risk to other risks faced by financial institutions – market risk, operational risk, liquidity risk, etc.   The course examines these risks, and the associated management tools and techniques, within the broader context of the Value-at-Risk (VaR) approach to integrated risk management. Finally, the course addresses the policy, practice and process issues that need to be part of an integrated risk management program within a financial institution.


Course Objectives
  • Define the market environment and risk management lessons
  • Define risk management and the role of the Regulators
  • Define and discuss the integrated view of risk management
  • Answer the question of why does the credit cycle exists?
  • Define the role of the credit reporting agencies
  • Define and discuss Internal Risk Rating Systems
  • Discuss ”measuring risk” in relation to the Value-at-Risk (VaR) approach
  • Explain and apply modern portfolio management techniques
  • Define credit risk management in relation to the VaR approach
  • Discuss the Options Theoretic Model of credit risk
    • Through practical application explain the KMV Mode
  • Discuss and review the CreditMetrics Model as it relates to:
    • A credit migration model of credit risk
    • An actuarial model of credit risk
  • Define and discuss credit portfolio risk management techniques
  • Identify the mechanics of  credit derivatives
  • Define the importance of operational risk
  • Revaluate and discuss integrated risk management
  • Review internal risk management organization
  • Discuss credit portfolio risk management and risk-adjusted return on capital

Module I Overview & Concepts

  • Market environment
  • Deregulation
  • Technology
  • Risk management lessons
    • Credit risk
    • Market risk
    • Operational risk
    • Liquidity Risk

Cases: Participants will review several cases

Module II Risk Management & the role of the regulators

  • Credit risk, capital & The Federal Reserve system & the Bank of England
  • The Bank of International Settlements (BIS) and Basel II I
  • VaR models & integrated risk management

Module III An Integrated View of Risk Management

  • Definition of risk
    • Market risk
    • Credit risk
    • Operational risk

Module IV The Credit Cycle: Does it exist?

  • Historical evidence
  • Recent experiences
  • The credit cycle & interest rates – interpretation

Module V The Role of the Credit Rating Agencies

  • Concepts
  • Process
  • Methodology
  • The Issuer / The Issue
  • Credit Enhancement Limitations

Module VI Internal Rating Systems

  • Exposure, default probability & expected loss
  • Default probabilities & recovery
  • Policies, structure, process
  • Role of agency ratings
  • Credit ratings & Risk-Adjusted Return on Capital (RAROC)

Module VII Measuring Risk: The Value-at-Risk (VaR) Approach

  • Traditional approaches
  • Notional amount
  • Value of a basis point and duration (bond market)
  • Value-at-Risk concept
  • Definition of VaR
  • Specified maximum loss
  • Specified time period
  • Specified probability
  • Calculating VaR
  • Variance-covariance approach
  • Monte Carlo approach
  • Historical simulation
  • Advantages & disadvantages

Module VIII Credit Risk Management – VaR Approach

  • Definition of Credit VaR
  • Return distribution: credit vs. security
  • Credit VaR & the capital charge
  • Expected loss, unexpected loss & economic capital

Module IX Practical Application: The KMV™ Model

  • Definition of Expected Default Frequency (EDF)
  • Addressing the non-normality issue

Module X A Credit Migration Model of Credit Risk: The CreditMetrics™ Model

  • The transition matrix
  • Defining a credit rating system
  • Establishing transition & default probability distributions
  • Determining a forward discount curve
  • Determining the capital charge

Module XI Credit Portfolio Risk Management and Risk-adjusted Return on Capital

  • Regulatory capital
  • Economic capital
  • Risk-adjusted return
  • Risk-adjusted capital
  • Risk-adjusted return on risk-adjust capital
  • Looking forward
Questions and Answers


  • Mayra Rodríguez Valladares is the Managing Principal of MRV Associates.  She specializes in training and consulting solutions for Basel III, Dodd-Frank, risk management, financial derivatives, capital markets, foreign exchange, and corporate finance.  She has worked with the private sector and foreign central banks in the US, UK, Latin America Eastern Europe, Central, and Southeast Asia, …
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