Credit risk - NYU Stern School of Business - New York University

Giddy/ABS Managing the Credit Risks/ 1 Asset-Backed Securities: Managing the Credit Risks Prof. Ian Giddy Stern School of Business New York University Asset-Backed Securities Copyright ©2000 Ian H. Giddy Managing Credit Risks 3 Asset-Backed Securities: Managing the Risks l Identifying the risks l Credit enhancement l The rating process l Financial guarantee companies Giddy/ABS Managing the Credit Risks/ 2 Copyright ©2000 Ian H. Giddy Managing Credit Risks 4 Identifying the Risks l Credit risks l Liquidity risk l Servicer performance risk l Swap counterparty risk l Guarantor risk l Legal risks l Sovereign risk l Interest rate and currency risks l Prepayment risks Copyright ©2000 Ian H. Giddy Managing Credit Risks 5 Special Purpose Company (or Trust)Special Purpose Company (or

Trust) ORIGINATOR SERVICER POOL PERFORMANCE GUARANTOR INTEREST & PRINCIPAL GUARANTOR OWNER SUB- ORDINATED INVESTORS OVER- COLLATERAL SENIOR INVESTORS CAP OR COLLAR PROVIDER PERMITTED INVESTMENTS SWAP COUNTER- PARTY RESERVE FUND SPECIAL INSURER (HAZARD, ETC.) FIRST LOSS PROVIDER LIQUIDITY FUND ASSETS 1 23 SELL ASSETS (MAY ADD MORE) Managing the Risks Giddy/ABS Managing the Credit Risks/ 3 Form of credit enhancement Credit risk reduction at the trust level Pooler credit guaranty Senior/subordinated ABS Legal structure based credit risk reduction Legal insulation from originator default Legal insulation from servicer default Repackaging of cash flows Pre-securitization risk reduction Screening of assets to be included in the portfolio Diversification of the portfolio Credit risk reduction of the asset Third party credit guaranty Issuer-provided enhancement Replacement of sub-standard assets Direct recourse Overcollateralization Third party partial enhancement Third party full enhancement Copyright ©2000 Ian H. Giddy Managing Credit Risks 9 Key Factors Agencies Examine l the quality of the pool of assets, evaluated as a portfolio l the credit quality of all the parties to the deal. l operational support for servicing, transfer, recording, follow-up, etc; l credit enhancement l legal structure l sovereign risks l market price risks l payment timing risks Giddy/ABS Managing the Credit Risks/ 4 Copyright ©2000 Ian H. Giddy Managing Credit Risks 10 Qualifications of the Originator l Organization and management structure l Financial performance l Business strategy and planning processes l Controls and procedures l Asset origination and credit assessment procedures l Quality of its loan documentation l Credit administation and debt recovery procedures Copyright ©2000 Ian H. Giddy Managing Credit Risks 11 Role of Originator's Review Systems l Produce historical information on the assets to be securitized l Identify and segregate the securitizable assets and track their cash flows l Report on the performance of the securitized assets Giddy/ABS Managing the Credit Risks/ 5 Copyright ©2000 Ian H. Giddy Managing Credit Risks 12 Rating Agency Requirements - 1 Legal Structure l Information on parties involved in the ABS issuance, namely, the originator(s), servicer , merchant bank, lawyers, accountants, trustees, credit enhancer, liquidity banks. l Proposed legal structure and documentation e.g., type of assets to be securitised , senior/subordination features; pass- throughs /pay- throughs , any recourse provisions, corporation/trust, over- collateralisations , other risks and claims structure, etc. l Legal and accounting opinions (and subsequently regulator's opinion) on the characterization of the transferred assets i.e., a "true sale" or "pledge". The...

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The Market Price of Credit Risk

1 The Ma rk et Price of Credit Risk Ka y Giesecke Cornell University giesecke@orie.cornell.edu www.orie.cornell.edu/ s giesecke Lisa R. Goldberg lrg@barra.com The Market Price of Credit Risk 2 We live in a dangerous world † Issuers of default able securities share a common dependence on the economic environment † Aggregate credit risk cannot be diversified away † Undiversified able o r systematic risk commands a p remium { Risk-averse investors must b e compensated for assuming systematic credit risk † The credit premium is empirically w ell-documented, and theoretically complex { Why is it important to understand it?

The Ma rk et Price of Credit Risk 3 Ho w is a credit mo del used? † T o fo recast the actual p robabilit y of default { Mo del must re ect histo rical default exp erience { Actual lik eliho o d of default † T o estimate the value of default sensitive securities { Mo del must flt ma rk et p rices { Ma rk et-implied lik eliho o d of default Actual Likelihood of Default Market-implied Likelihood of Default Credit Risk Premium The Market Price of Credit Risk 4 What’s the difference? Risk less bond Default able bond R(1)=10R(0)=10 t=0 t=1 D(1)=20 if no default D(0)=5 D(1)=0 if default p=0.5 Actual likelihood of default p=0.5 (coin flip) 1-p Market-implied likelihood of default q=0.75 1-q q The Market Price of Credit Risk 5 First passage structural credit model † Default occurs when firm value X falls below a barrier D : ¿ = inf f t > 0 : X t • D g † Requires { A model of firm value process X { A model of default barrier D † Identifies equity as a down-and-out call option on the firm † Default probability given b y the distribution of min s• T X s The Market Price of Credit Risk 6 First passage structural credit model D Default No Default Default Probability τ τ τ T X Density of minimum of X The Market Price of Credit Risk 7 First passage credit risk premium † Credit risk is exclusively driven b y uncertainty ab out firm value † Risk premium takes a familiar fo rm (X a („; )-GBM) { Excess return on credit sensitive security is equal to its
isk" times the market p rice of that risk { Risk is measured in terms of difiusive price volatility { The market p rice of risk is given b y „ ¡ r ; the excess return „ ¡ r on the firm p er unit of firm risk The Market Price of Credit Risk 8 Caveats This simple representation of the risk premium neglects the short-term uncertainty surrounding the default † Distance...

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General Disposal Authority for Financial and Accounting Records

State Records Office of Western Australia General Disposal Authority for Financial and Accounting Records RD 2005010 Published by the State Records Commission, 2006 GENERAL DISPOSAL AUTHORITY FOR FINANCIAL AND ACCOUNTING RECORDS State Records Office of Western Australia - RD 2005010 © Copyright is reserved by the State Records Commission 2006. All rights reserved. One copy may be produced of this Authority to be used as a working copy. Otherwise no part of this Authority may be used, stored, reproduced or transmitted in any form or by any means, electronic, mechanised, photocopying, recording or otherwise, except under the terms of a licence authorised by the State Records Commission of Western Australia. An electronic version may also be purchased from the State

Records Office of Western Australia under a licence agreement with the State Records Commission of Western Australia. GENERAL DISPOSAL AUTHORITY FOR FINANCIAL AND ACCOUNTING RECORDS State Records Office of Western Australia - RD 2005010 CONTENTS INTRODUCTION............................................................................................................................................................................................i 1 Background .........................................................................................................................................................................................i 1.2 Acknowledgements............................................................................................................................................................................ii 2 Legislative, Regulatory and Policy Requirements .............................................................................................................................ii 2.1 Electronic Transactions and Electronic Records.............................................................................................................................. iii 2.2 Evidence ............................................................................................................................................................................................v 2.3 Freedom of Information (FOI) ...........................................................................................................................................................vi 2.4 Investigations and Inquiries ..............................................................................................................................................................vi 2.5 Western Australian Government Publications ................................................................................................................................. vii 3 Amalgamations of State Organizations............................................................................................................................................ vii USE OF THE AUTHORITY........................................................................................................................................................................ viii 4 Scope and Arrangement of the General Disposal Authority........................................................................................................... viii 4.1 Amendments to the General Disposal Authority...............................................................................................................................ix 4.2 Overlap with other General Disposal Authorities..............................................................................................................................ix 4.3 Replacement of Existing Disposal Coverage ...................................................................................................................................ix 4.4 Financial and Accounting Records Not Covered by this General Disposal Authority......................................................................ix 5 Significant Records ............................................................................................................................................................................x 6 Policies and Procedures....................................................................................................................................................................xi 7 Duplicates or Copies of State Records .............................................................................................................................................xi 8 Ephemeral Records...........................................................................................................................................................................xi 9 Photographs and Audiovisual Records.............................................................................................................................................xi RETENTION AND DISPOSAL OF STATE RECORDS............................................................................................................................. xii 10 Disposal of State Records................................................................................................................................................................ xii 11 Retaining State Records for Longer Periods .................................................................................................................................. xiii 12 Files Containing State Records with Differing Retention Periods or with Mixed Dispositions........................................................ xiii GENERAL DISPOSAL AUTHORITY FOR FINANCIAL AND ACCOUNTING RECORDS State Records Office of Western Australia - RD 2005010 13 Responsibility for Destruction of State Records.............................................................................................................................. xiv 14 Transfer of State Archives............................................................................................................................................................... xiv 14.1 Hard Copy Records ........................................................................................................................................................................ xiv 14.2 Electronic Records.......................................................................................................................................................................... xiv 14.3 Restricted Access Archives .............................................................................................................................................................xv 15 Recommended Methods of Destruction of State Records...............................................................................................................xv 15.1 Hard Copy Records .........................................................................................................................................................................xv 15.2 Electronic Records...........................................................................................................................................................................xv 15.3 Microform and Tape Records ......................................................................................................................................................... xvi DEFINITIONS OF TERMS USED IN THE AUTHORITY.......................................................................................................................... xvii BIBLIOGRAPHY........................................................................................................................................................................................ xix PART A – EPHEMERAL RECORDS...........................................................................................................................................................1 1 EPHEMERAL RECORDS.................................................................................................................................................................1 PART B - FINANCIAL AND ACCOUNTING RECORDS.............................................................................................................................3 2 ACQUISITION...................................................................................................................................................................................3 3 ADVANCES.......................................................................................................................................................................................5 4 AGREEMENTS / CONTRACTING-OUT / JOINT VENTURES ........................................................................................................6 5 ALLOCATION ...................................................................................................................................................................................7 6 ASSET MANAGEMENT....................................................................................................................................................................8 7 AUDIT................................................................................................................................................................................................9 8 AUTHORISATION...........................................................................................................................................................................10 9 BANKING AND BANK ACCOUNTS ...............................................................................................................................................11 10 BOOKS OF ACCOUNT...................................................................................................................................................................11 11 BUDGETING...................................................................................................................................................................................12 12 CAPITAL WORKS AND CONSTRUCTION....................................................................................................................................13 13 CHEQUE MANAGEMENT..............................................................................................................................................................14 GENERAL DISPOSAL AUTHORITY FOR FINANCIAL AND ACCOUNTING RECORDS State Records Office of Western Australia - RD 2005010 14 COMPLIANCE ................................................................................................................................................................................15 15 CORPORATE CREDIT CARDS .....................................................................................................................................................15 16 CREDITORS ...................................................................................................................................................................................16 17 DEBTORS.......................................................................................................................................................................................17 18 DEFICIENCIES AND LOSSES.......................................................................................................................................................18 19 DISPOSAL ......................................................................................................................................................................................19 20 DISTRIBUTION...............................................................................................................................................................................20 21 DONATIONS...................................................................................................................................................................................21 22 EXPENDITURE AND PAYMENTS.................................................................................................................................................22 23 FEES AND CHARGES ...................................................................................................................................................................23 24 FORMS ...........................................................................................................................................................................................23 25 FUNDRAISING ...............................................................................................................................................................................24 26 GRANT FUNDING ..........................................................................................................................................................................24 27 INSURANCE ...................................................................................................................................................................................25 28 PLANNING......................................................................................................................................................................................27 29 POLICY ...........................................................................................................................................................................................28 30 PROCEDURES...............................................................................................................................................................................29 31 RECEIPTS AND REVENUE...

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Intraday Credit: Risk, Value, and Pricing - Federal Reserve Bank

INTRADAY CREDIT: RISK, VALUE, AND PRICING David L. Mengle, David B. Humphrey, and Bruce J. Summers* I. Introduction Electronic payment networks are of value because they provide certainty of payment, security, timeliness, and low cost relative to the dollar value transferred.1 Timeliness is particularly important to money market participants who want to be able to act immediately on changes in market conditions, but it does not come without cost. While banks have invested heavily in speeding up wire transfers, the same level of emphasis has not been placed on control- ling wire transfer risk. Because the banking system does not exactly synchronize the increasing volume of intraday payments activity, outgoing transfers are not always ade- quately funded by the originating

party. Consequently, wire transfer networks are characterized by exposure of participants to intraday credit risk, that is, risk that lenders may not be repaid at the end of the business day. Traditionally, bank regulation has focused on risks reflected on bank balance sheets. For example, bank supervision attempts to reduce credit risk from loan losses by examining asset quality, while capital requirements seek to build a protective buffer into balance sheets. More recently, regulators have also become concerned with risks connected with growing off balance sheet activities such as letters of credit and loan commitments.2 Now, intra- day credit risk associated with wire transfer networks is attracting attention. This risk cannot be measured by tradi- tional methods that focus on balance sheets showing banks’ financial positions only at the end of the day. Even looking at contingent liabilities off the balance sheet does not help here. Rather, one must look at payment activity during the day to see how intraday financial intermedi- ation affects the banking system. The purpose of this article is to develop a framework to illustrate why intraday credit risk exists and what deter- mines its level. The analysis will show how pricing intra- day credit could lead to behavioral changes that would reduce intraday risk exposures. In addition, the empirical section of the paper will explore ways in which pricing might be put into practice. The views in this article are those of the authors and do not necessarily reflect the views of the Federal Reserve Bank of Richmond or the Board of Governors of the Federal Reserve System. The authors wish to acknowledge the expert research assistance of William Whelpley. Sec- tion IV and the box on pp. 8-9 are based on Humphrey et al. (1987). 1 The most important wire transfer networks are described in more detail on p. 4. 2 Bennett (1986) and Summers (1975). Most discussions of risk on wire transfer networks assume either explicitly or implicitly that intraday credit risk arises from the inherent nature of electronic funds transfer systems.3 By this assumption, the level of risks faced by payments system participants is attributable to such institutional factors as the large volume of wire transfers, a high degree of interdependence among banks, the speed with which funds change hands, and the ex- treme difficulty of exactly matching inflows with outflows. In contrast, it will be argued here that risk levels and...

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Chapter 4 Structural Models of Credit Risk

Chapter 4 Structural Models of Credit Risk Broadly speaking, credit risk concerns the possibility of financial losses due to changes in the credit quality of market participants. The most radical change in credit quality is a default event. Operationally, for medium to large cap firms, default is normally triggered by a failure of the firm to meet its debt servicing obligations, which usually quickly leads to bankruptcy proceedings, such as Chapter 11 in the U.S. Thus default is considered a rare and singular event after which the firm ceases to operate as a viable concern, and which results in large financial losses to some security holders. With some flexible thinking, this view of credit risk also extends to sovereign bonds

issued by countries with a non-negligible risk of default, such as those of developing countries. Under structural models, a default event is deemed to occur for a firm when its assets reach a sufficiently low level compared to its liabilities. These models require strong assumptions on the dynamics of the firm’s asset, its debt and how its capital is structured. The main advantage of structural models is that they provide an intuitive picture, as well as an endogenous explanation for default. We will discuss other advantages and some of their disadvantages in what follows. 4.1 The Merton Model (1974) The Merton model takes an overly simple debt structure, and assumes that the total value A t of a firm’s assets follows a geometric Brownian motion under the physical measure dA t = µA t dt+ σA t dW t ,A 0 > 0, (4.1) where µ is the mean rate of return on the assets and σ is the asset volatility. We also need further assumptions: there are no bankruptcy charges, meaning the liquidation value equals the firm value; the debt and equity are frictionless tradeable assets. Large and medium cap firms are funded by shares (“equity”) and bonds (“debt”). The Merton model assumes that debt consists of a single outstanding bond with face value K and maturity T. At maturity, if the total value of the assets is greater than the debt, the latter is paid in full and the remainder is distributed among shareholders. However, if 41 42 CHAPTER 4. STRUCTURAL MODELS OF CREDIT RISK A T
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Statement of Financial Accounting Standards No. 116 - FASB

Statement of Financial Accounting Standards No. 116 FAS116 Status Page FAS116 Summary Accounting for Contributions Received and Contributions Made June 1993 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116 Copyright © 1993 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board. Page 2 Statement of Financial Accounting Standards No. 116 Accounting for Contributions Received and Contributions Made June 1993 CONTENTS Paragraph Numbers Introduction ....................................................................................................................1–2 Standards of Financial Accounting and Reporting: Scope ......................................................................................................................3–4

Definitions...................................................................................................................5–7 Contributions Received.............................................................................................8–16 Contributed Services.............................................................................................9–10 Contributed Collection Items..............................................................................11–13 Reporting by Not-for-Profit Organizations.........................................................14–16 Expiration of Donor-imposed Restrictions..................................................................17 Contributions Made .....................................................................................................18 Measurement at Fair Value....................................................................................19–21 Conditional Promises to Give................................................................................22–23 Disclosures of Promises to Give............................................................................24–25 Financial Statement Presentation and Disclosure for Collections.........................26–27 Effective Date and Transition................................................................................28–30 Appendix A: Background Information.......................................................................31–42 Appendix B: Basis for Conclusions .........................................................................43–172 Appendix C: Examples of the Application of This Statement to Specific Situations............................................................................................173–208 Appendix D: Glossary 209 Page 3 Copyright © 1993, Financial Accounting Standards Board Not for redistribution FAS 116: Accounting for Contributions Received and Contributions Made FAS 116 Summary This Statement establishes accounting standards for contributions and applies to all entities that receive or make contributions. Generally, contributions received, including unconditional promises to give, are recognized as revenues in the period received at their fair values. Contributions made, including unconditional promises to give, are recognized as expenses in the period made at their fair values. Conditional promises to give, whether received or made, are recognized when they become unconditional, that is, when the conditions are substantially met. This Statement requires not-for-profit organizations to distinguish between contributions received that increase permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets. It also requires recognition of the expiration of donor-imposed restrictions in the period in which the restrictions expire. This Statement allows certain exceptions for contributions of services and works of art, historical treasures, and similar assets. Contributions of services are recognized only if the services received (a) create or enhance nonfinancial assets or (b) require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation. Contributions of works of art, historical treasures, and similar assets need not be recognized as revenues and capitalized if the donated items are added to collections held for public exhibition, education, or research in furtherance of public service rather than financial gain. This Statement requires certain disclosures for collection items not capitalized and for receipts of contributed services and promises to give. This Statement is effective for financial statements issued for fiscal years beginning after December 15, 1994, except for not-for-profit organizations with less than $5 million in total assets and less than $1 million in annual expenses. For those organizations, the Statement is effective for fiscal years beginning after December 15, 1995. Earlier application is encouraged. This Statement may be applied either retroactively or by recognizing the cumulative...

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Taking the Mystery Out of Retirement Planning - United States

This publication has been developed by the U.S. Department of Labor, Employee Benefits Security Administration (EBSA), and its partners. It is available on the Internet at: www.dol. gov/ebsa. To view this and other EBSA publications, visit the agency's Web site at: www.dol. gov/ebsa. To order publications, contact us electronically at: www.askebsa.dol.gov. Or call toll free: 1-866-444-3272 This material will be made available in alternate format to persons with disabilities upon request: Voice phone: (202) 693-8664 TTY: (202) 501-3911 created by Employee Benefits Security Administration in partnership with We also thank the AARP for its valuable contributions to this publication. This booklet constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Act of 1996. January 2012

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QIS3 Calibration of the credit risk

CEIOPS- FS-23/07 Q Q I I S S 3 3 C C a a l l i i b b r r a a t t i i o o n n o o f f t t h h e e c c r r e e d d i i t t r r i i s s k k April 2007 CEIOPS e.V. - Westhafenplatz 1 – 60327 Frankfurt am Main – Germany – Tel. + 49 69-951119-20 – Fax. + 49 69-951119-19 email: secretariat@ceiops.org ; Website: www.ceiops.org Table of content Introduction ............................................................. 3 Spread risk ............................................................... 5 Counterparty default risk........................................ 12 Concentration risk .................................................. 22 Examples ................................................................ 33 2 1. Section 1 Introduction 1.1 This paper

deals with the calibration of credit risk within the SCR standard formula. The QIS2 credit risk module is replaced with separate modules for counterparty default risk (SCR def ), spread risk (Mkt sp ) and an additional, explicit recognition of the risk arising from concentrations (Mkt conc ). The spread risk and concentration risk modules will fall under the market risk category. This broadly reflects the approach envisaged by some of CEIOPS' stakeholders, and also has the advantage that it is more closely aligned with requirements in the banking sector. 1.2 Spread risk is the part of risk originating from financial instruments that is explained by the volatility of credit spreads over the risk-free interest rate term structure. ƒ The spread risk module includes the systematic part of migration and default risk implicitly via the movements in credit spreads. Credit indices rebalance on a monthly basis and, consequently, the change of their constituents, due to downgrades or upgrades, has a monthly frequency as well. Hence, the impact of intra-month downgrades/upgrades has already been reflected in the movements of credit spreads. However, further consideration may need to be given to the allowance made in the calibration for potential credit migrations and defaults. ƒ The spread risk module assumes well diversified portfolios. The concentration risk module captures the specific or idiosyncratic risk components. ƒ The spread risk module includes credit derivatives (e.g. credit default swaps). The module takes account of exposures to the originator of the reference, or underlying, obligation of the derivative contract. The 1 associated default risk on the protection seller will be part of the counterparty default risk module. 1.3 The counterparty default risk module deals with the risk of default of a counterparty to risk mitigating contracts like reinsurance and financial derivatives. ƒ The counterparty default risk module includes concentration risks. 1 The protection seller will be obligated to pay for the loss incurred by creditors of the reference obligation in the event of its default. 3 The concentration in both reinsurance and financial derivatives exposures are calculated via the Herfindahl index. ƒ The module includes counterparty risk arising from financial derivatives (e.g. interest rate swaps and credit default swaps). 1.4 Market risk concentrations present an additional risk to an insurer because of lack of diversification. ƒ Additional volatility that exists in concentrated asset portfolios; and ƒ Additional specific or idiosyncratic default and migration risks. 1.5 Section 2...

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A New Angle on Sovereign Credit Risk - UNEP Finance Initiative

Phase 1 Report www.unep.org United Nations Environment Programme P.O. Box 30552 Nairobi, Kenya Tel.: 254 20 62 1234 Fax: 254 20 62 3927 E-mail: cpiinfo@unep.org A New Angle on Sovereign Credit Risk E-RISC: Environmental Risk Integration in Sovereign Credit Analysis United Nations Environment Programme Finance Initiative (UNEP FI) UNEP FI is a unique partnership between the United Nations Environment Programme (UNEP) and the global financial sector. UNEP FI works closely with over 200 financial institutions that are signatories to the UNEP FI Statement on Sustainable Development, and a range of partner organisations, to develop and promote linkages between sustainability and financial performance. Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote and realise the

adoption of best environmental and sustainability practice at all levels of financial institution operations. Global Footprint Network Global Footprint Network is an international think tank working to advance sustainability through the use of the Ecological Footprint, a resource accounting tool that measures how much nature we have, how much we use and who uses what. Global Footprint Network coordinates research, develops methodological standards and releases annual data on the Ecological Footprint and biocapacity of 232 countries and humanity as a whole. By providing robust resource accounts to track the supply of and demand on ecological assets, Global Footprint Network equips decision-makers with the data they need to succeed in a world facing tightening ecological constraints. Disclaimer Unless expressly stated otherwise, the opinions, findings, interpretations and conclusions expressed in the paper are those of the various contributors. They do not necessarily represent the decision or the stated policy of the United Nations Environment Programme, nor the views of UNEP, the United Nations or its Member States. Neither do they represent the consensus views of the member institutions of UNEP FI. The designations employed and the presentation of material in this paper do not imply the expression of any opinion whatsoever on the part of the United Nations Environment Programme concerning the legal status of any country, territory, city or area or of its authorities, or concerning delimitation of its frontiers or boundaries. Design: Instaprint, Geneva Published in 2012 by UNEP FI and Global Footprint Network Copyright © UNEP FI, Global Footprint Network UNEP Finance Initiative International Environment House 15, Chemin des Anémones 1219 Châtelaine, Genève Switzerland Tel: (41) 22 917 8178 Fax: (41) 22 796 9240 fi@unep.ch www.unepfi.org UNEP promotes Printed in Switzerland by Instaprint using vegetable-oil-based inks and environmentally sound practices FSC- (Forest Stewardship Council-) certified, elemental-chlorine- globally and in its own activities. This free paper. Permanent use of Stacatto random rastering enables publication is printed on 100% recycled paper, an ink-use reduction of 25 per cent, and a central water filtering plant reduces water and alcohol consumption by 75 per cent. using vegetable-based inks and other eco- friendly practices. Our distribution policy aims to reduce UNEP’s carbon footprint. Key Messages Sovereign bonds represent over 40 per cent of This report addresses how and why natural the global bond market, and are therefore one resource and environmental risks are becoming of the most important asset classes held by financially material...

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Transparency, Financial Accounting Information, and Corporate Governance

FRBNY Economic Policy Review / April 2003 65 Transparency, Financial Accounting Information, and Corporate Governance 1. Introduction ibrant public securities markets rely on complex systems of supporting institutions that promote the governance of publicly traded companies. Corporate governance structures serve: 1) to ensure that minority shareholders receive reliable information about the value of firms and that a company’s managers and large shareholders do not cheat them out of the value of their investments, and 2) to motivate managers to maximize firm value instead of pursuing personal objectives. 1 Institutions promoting the governance of firms include reputational intermediaries such as investment banks and audit firms, securities laws and regulators such as the Securities and Exchange Commission (SEC) in the United States,

and disclosure regimes that produce credible firm-specific information about publicly traded firms. In this paper, we discuss economics-based research focused primarily on the governance role of publicly reported financial accounting information. Financial accounting information is the product of corporate accounting and external reporting systems that measure and routinely disclose audited, quantitative data concerning the financial position and performance of publicly held firms. Audited balance sheets, income statements, and cash-flow statements, along with supporting disclosures, form the foundation of the firm-specific information set available to investors and regulators. Developing and maintaining a sophisticated financial disclosure regime is not cheap. Countries with highly developed securities markets devote substantial resources to producing and regulating the use of extensive accounting and disclosure rules that publicly traded firms must follow. Resources expended are not only financial, but also include opportunity costs associated with deployment of highly educated human capital, including accountants, lawyers, academicians, and politicians. In the United States, the SEC, under the oversight of the U.S. Congress, is responsible for maintaining and regulating the required accounting and disclosure rules that firms must follow. These rules are produced both by the SEC itself and through SEC oversight of private standards-setting bodies such as the Financial Accounting Standards Board and the Emerging Issues Task Force, which in turn solicit input from business leaders, academic researchers, and regulators around the world. In addition to the accounting standards-setting investments undertaken by many individual countries and securities exchanges, there is currently a major, well-funded effort in progress, under the auspices of the International Accounting Standards Board (IASB), to produce a single set of accounting standards that will ultimately be acceptable to all countries as the basis for cross-border financing transactions. 2 The premise behind governance research in accounting is that a significant portion of the return on investment in accounting regimes derives from enhanced governance of firms, which in turn facilitates the operation of securities Robert M. Bushman and Abbie J. Smith Robert M. Bushman is a professor of accounting at the University of North Carolina’s Kenan-Flagler Business School; Abbie J. Smith is the Marvin Bower Fellow at Harvard Business School and the Boris and Irene Stern Professor of Accounting at the University of Chicago’s Graduate School of Business. The authors thank Erica Groshen, James Kahn, and Hamid Mehran for useful comments. Robert Bushman thanks the Kenan-Flagler Business School for financial support; Abbie Smith thanks Harvard Business...

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Application for IRB approach, credit risk - Finansinspektionen

Application for IRB approach, credit risk= Februar 2007 TABLE OF CONTENTS 1. SUMMARY 1 2. BACKGROUND 2 3. GENERAL INFORMATION REGARDING THE REVIEW PROCEDURE 3 4. FORMULATION OF APPLICATION 6 5. FLYSHEET 8 6. APPLICATION QUESTIONNAIRE 16 = = = FINANSINSPEKTIONEN FEBRUARI 2007 N= = 1. Summary This report contains Finansinspektionen’s instructions regarding the manner in which an institution or financial group should structure its information when applying to use an internal ratings-based methodology for calculation of the capital requirement for credit risk. Questions regarding this report will be answered by the Credit and Operational Risk Unit at Finansinspektionen’s Stability Department. == FINANSINSPEKTIONEN FEBRUARI 2007 O= = 2. Background The Capital Adequacy and Large Exposures Act (2006:1371) and the Capital

Adequacy and Large Exposures Ordinance (2006:1533) entered into force on 1 February 2007. Pursuant to sections 32–34 of the Ordinance, Finansinspektionen has decided on regulations and general guidelines (FFFS 2007:1) for capital adequacy and large exposures. In accordance with these new rules, institutions, i.e. banks, credit market companies and investment firms, may apply for permission to use an internal ratings based approach, the IRB approach, to calculate the capital requirement for credit risk. Finansinspektionen issues this type of permission, and its review of the reliability of the institution’s methods is based on FFFS 2007:1. An institution intending to apply for permission to use an IRB approach should contact Finansinspektionen well in advance of the formal submittance of the application in order to start a dialogue and discuss an appropriate date for permission. This procedure is required in order to allow Finansinspektionen to allocate and distribute needed resources. The requirements imposed for using an IRB approach are relatively extensive. Consequently, Finansinspektionen must receive from institutions relatively extensive information in order to assess the quality of their IRB approach. Finansinspektionen has therefore compiled an instruction outlining which type of information the institution should submit in order for Finansinspektionen to be able to assess the institution’s compliance with the requirements set out in the individual sections of the regulations. This application can be used by institutions submitting an initial request for a review and by institutions that requested a gradual implementation and are about to submit supplementing information for the portfolios that will be reviewed. The application should also be used by institutions that at a later stage, after an initial review, will apply for permission in accordance with Chapter 38, section 6. FINANSINSPEKTIONEN FEBRUARI 2007 P= = 3. General information regarding the review procedure 3.1.1 Scope and gradual implementation A financial group may submit an application covering the capital requirement calculation on a consolidated basis and on an individual basis for the parent company and subsidiaries included in the group. (In the text below we refer to the institution as the applicant, however, the application may be submitted on group basis for the parent company and the subsidiaries included in the financial group.) Institutions which do not constitute subsidiaries but where the owner firm only holds a participating interest, i.e. the owner firm owns more than 20% but less than 50%, shall submit a separate application. In cases where such a firm...

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Credit Risk Profile – OFT Form CRP 1 - Office of Fair Trading

Consumer Credit Licensing Credit Risk Profile – OFT Form CRP 1 For more information go to www.oft.gov.uk Please read these guidance notes carefully before completing the form. What is the purpose of this form? The Credit Risk Profile form is designed to assist the Office of Fair Trading in considering the skills, knowledge, experience and business controls of an applicant or licensee in determining whether it is competent to carry out regulated credit activities. If you knowingly or recklessly misrepresent, or fail to reveal, information that you are asked to provide, you will have committed a criminal offence under the Consumer Credit Act 1974. Please note that, after receipt of your completed form, we may still need to contact you

for any further information we consider necessary to consider your application. Who should fill in this form? This form is applicable for all applicants for any of the following licence categories: A – Consumer credit C – Credit brokerage G – Debt Administration who have also answered “yes” to any of the questions relating to secured, sub-prime or at home lending or broking; or “yes” to the questions relating to secured or sub-prime debt administration, and for all applicants for the following category I – Credit reference agency Before completing the form you should check whether you actually need to apply for a consumer credit licence. YOU SHOULD ONLY APPLY FOR LICENCE CATEGORIES YOU WILL ACTUALLY REQUIRE. See www.oft.gov.uk for further details. F or m CRP 1 Contents of the form The contents of the form are as follows: Part 1 Business details Part 2 Skills, knowledge and experience Part 3 Business practices and procedures Part 4 Complaints handling Part 5 Lenders only – money laundering Part 6 Credit reference agencies Part 7 Declaration Data protection The information you provide in this form will be processed in accordance with data protection principles. Whilst the Data Protection Act 1998 and section 237 of the Enterprise Act 2002 restrict disclosure of the information provided in this form, they also allow disclosure for a number of purposes without your further consent. You will be informed of such disclosure where this is reasonably practical. For example, the OFT may use the information in connection with enforcement or regulatory action it takes under its own powers or may refer the information to other government departments or regulatory, enforcement or public authorities in connection with the exercise of their functions. For help with this form, call 020 7211 8608, 9am to 5pm Monday to Friday. Filling in the form The purpose of this form is to collect information about your skills, knowledge and experience in relation to the high-risk credit activities which you have applied for; and about the business practices and procedures which you will have in place to ensure you are able to comply with the standards of business behaviour expected from those who engage in these credit activities. Some of the questions in the form are worded in general terms and this reflects the large differences between the types of firms which will need to apply for these licence categories, ranging from small...

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Agriculture Financial Accounting Standards Manual

AGRICULTURE FINANCIAL STANDARDS MANUAL Office of the Chief Financial Officer Credit, Travel, and Accounting Policy Division Revised May 2004 May 2004 Agriculture Financial Standards Manual ______________________________________________________________________________ I May 2004 Agriculture Financial Standards Manual ______________________________________________________________________________ II Summary of Changes Section Date Item Changed Change Authoritative Sources FASAB, SFFAC, SFFAS, and OMB Circulars Nov 03 Added SFFAC 4, Intended Target Audience and Qualitative Characteristics for the Consolidated Financial Report of the United States Government “ “ Added SFFAS 23, Eliminating the Category National Defense Property, Plant, and Equipment (not applicable to USDA operations) “ “ Added SFFAS 24, Selected Standards For The Consolidated Report of the United States Government “ “ Added SFFAS 25, Reclassification of Stewardship Responsibilities and Eliminating the Current

Services Assessment “ “ OMB Circular A-125, Prompt Payment Rescinded and replaced by Prompt Pay regulations at 5 CFR Part 1315 Internal Use Software Definition of Software “ Added numerals 1-3 to the definition of software (1) off-the-shelf from vendors, (2) developed by contractors or (3) developed internally. Internal Use Software Capitalized Cost “ Deleted Preliminary Design Phase and the from Capitalized Cost description Now reads … full cost incurred during the Software Development Phase Internal Use Software Capitalization Threshold “ Added Effective FY 2001 … with an estimated service life of 2 years or more. Internal Use Software Amortization/Useful Life “ Deleted The Office of the CIO should have responsibility for determining the estimated useful life of the software. Program offices should coordinate with the OCIO regarding the estimated useful life of software. Internal Use Software Amortization/Useful Life “ Deleted Amortization of internal use software will not begin until the Software Development Phase is completed. Amortization of internal use software begins after the Software Development Stage is completed. Upon completion, these costs will be transferred from USSGL account 1832, “Internal-Use Software in Development, to USSGL account, 1830, “Internal-Use Software.” Internal Use Software Models/Components “ Deleted In terms of amortization Internal Use Software Enhancements “ Deleted If … are … they …. Costs incurred which extend the functionality and the useful life of internal use software should be capitalized. Internal Use Software “ Deleted The amortization of these costs shall not exceed 5 years. May 2004 Agriculture Financial Standards Manual ______________________________________________________________________________ III Section Date Item Changed Change USDA Directives Mar-04 DR2200-002, Capitalization/Depreciation Real/Personal Property DR2200-002, Property, Plant and Equipment Internal Use Software May-04 Added Title: Recognition, Measurement, and Disclosure Internal Use Software “ Added titles and discussion of the following topics Data Conversion Costs Cutoff for Capitalization Integrated Software Bundled Products and Services Internal Use Software “ Deleted Training. Initial training should be capitalized. All recurring training must be expensed as incurred. Training costs should include personnel labor costs, facilities, and supplies and materials. Each of the costs are in separate cost pools and therefore, need to be appropriately coded in order to capture the costs as capitalized cost or expense. Training. Training costs must be recognized as expense as incurred. Even though these may be costs which are associated with the internal development or acquisition of software for internal use, under GAAP those costs relate to the period in...

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Choosing A Retirement Solution for Your Small Business

CHOOSING for Your A RETIREMENT SOLUTION Small Business Choosing a Retirement Solution for Your Small Business is a joint project of the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) and the Internal Revenue Service. To view this and other EBSA publications, visit the agency’s website at: www.dol.gov/ebsa. To order publications or request assistance from a benefits advisor, contact EBSA electronically at: www.askebsa.dol.gov. Or call toll free: 1-866-444-3272. Choosing a Retirement Solution for Your Small Business (IRS Publication 3998) is also available from the Internal Revenue Service at: 800-TAX-FORM (829-3676). (Please indicate catalog number 34066S when ordering.) This publication will be made available in alternative format to persons with disabilities upon request. Voice Phone: (202) 693-8664 TDD* phone: (202)

501-3911 This publication constitutes a small entity compliance guide for purposes of the Small Business Regulatory Enforcement Fairness Act of 1996. It does not constitute legal, accounting, or other professional advice. Starting a retirement savings plan can be easier than most business owners think. What’s more, there are a number of retirement programs that provide tax advantages to both employers and employees. Why Save? Experts estimate that Americans will need 70 to 90 percent of their preretirement income to maintain their current standard of living when they stop working. So now is the time to look into retirement plan programs. As an employer, you have an important role in helping America’s workers save. A Few Retirement Facts Most private-sector retirement vehicles are either By starting a retirement savings plan, you will help Individual Retirement Arrangements (IRAs), defined your employees save for the future. Retirement plans contribution plans, or defined benefit plans. may also help you attract and retain qualified employ- ees, and they offer tax savings to your business. You People tend to think of an IRA as something that will help secure your own retirement as well. You can individuals establish on their own, but an employer establish a plan even if you are self-employed. can help its employees set up and fund their IRAs. With an IRA, the amount that an individual receives at retirement depends on the funding of the IRA and the Any Tax Advantages? earnings (or losses) on those funds. A retirement plan has significant tax advantages: Defined contribution plans are employer-established q Employer contributions are deductible from plans that do not promise a specific amount of benefit the employer’s income, at retirement. Instead, employees or their employer q Employee contributions (other than Roth (or both) contribute to employees’ individual accounts contributions) are not taxed until distributed to under the plan, sometimes at a set rate (such as 5 the employee, and percent of salary annually). At retirement, an employee q Money in the plan grows tax-free. receives the accumulated contributions plus earnings (or minus losses) on the invested contributions. Any Other Incentives? Defined benefit plans, on the other hand, promise a In addition to helping your business, your employees specified benefit at retirement, for example, $1,000 a and yourself, it is easy to establish a retirement plan, month. The amount of the benefit is often based on and there are additional reasons for doing...

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Credit Risk Rating at Australian Banks

Credit Risk Rating at Australian Banks Working Paper 7 December 2000 Andrew McDonald Guy Eastwood CREDIT RISK RATING AT AUSTRALIAN BANKS Andrew McDonald and Guy Eastwood Working Paper 7 ABSTRACT This working paper summarises a survey of the internal credit risk rating practices at 10 Australian banks. The survey is a response to international proposals to develop more risk sensitive capital adequacy requirements utilising banks’ internal credit risk ratings. It examines various elements of the Australian banks’ internal credit risk rating systems, including the systems’ basic architecture, operating design and applications. Comparisons of the survey findings with those from similar international surveys are also provided. JEL Classification Numbers: G21 Keywords: Credit Risk Rating,APRA,Australia, Banks Table of Contents 1 INTRODUCTION 3

2 OVERVIEW OF INTERNAL CREDIT RISK RATING SYSTEMS 5 2.1 SYSTEM ARCHITECTURE 5 2.2 OPERATING DESIGN 7 2.3 APPLICATIONS 8 3 CREDIT RISK RATING AT AUSTRALIAN BANKS 9 3.1 ARCHITECTURE OF AUSTRALIAN BANKS’ CREDIT RATING SYSTEMS 9 3.1.1 LOSS CONCEPT 9 3.1.2 NUMBER OF RISK GRADES 11 3.1.3 DISTRIBUTION OF EXPOSURES AMONG RISK GRADES 14 3.1.4 POINT-IN-TIME VS THROUGH-THE-CYCLE GRADING 15 3.2 OPERATING DESIGN FEATURES 16 3.2.1 EXPOSURES RATED 16 3.2.2 CUSTOMER PD RATINGS 16 (i) TYPES OF RATING PROCESSES 16 (ii) KEY RATING RISK FACTORS 18 (iii) LINK TO QUANTITATIVE DEFAULT STATISTICS 18 3.2.3 FACILITY LGD RATINGS 20 3.2.4 SYSTEM OVERSIGHT AND CONTROL PROCESSES 21 3.2.5 VALIDATION PROCEDURES 22 3.3 RATING APPLICATIONS 23 4 CONCLUDING REMARKS 25 APPENDIX 1:TYPES OF CREDIT RISK RATING MODELS 27 APPENDIX 2: EXAMPLE TWO-DIMENSIONAL CREDIT RISK RATING MATRIX 29 REFERENCES 30 APRA DECEMBER 20002 1 INTRODUCTION Credit risk rating has become an important feature of most Australian banks’ credit risk management systems over the past decade. This reflects the efforts of institutions to strengthen credit management practices following the asset quality problems of the late 1980s/early 1990s, wider availability and growing familiarity with rating techniques of increasing sophistication within the industry, and a growing array of uses to which ratings may be applied. The Australian Prudential Regulation Authority (APRA) – as well as its predecessor as banking supervisor, the Reserve Bank of Australia – has also sought to encourage the use of credit rating systems, including through prudential guidelines originally issued to banks in 1995 and recently updated to apply to authorised deposit-taking institutions more generally. 1 This paper surveys the internal credit risk rating systems currently utilised by Australian banks and compares local rating practices with those found internationally. The main motivation for the paper stems from proposals that have been put forward by the Basel Committee on Banking Supervision for the reform of international bank capital adequacy guidelines, aimed at increasing the sensitivity of regulatory capital requirements to differences in institutions’ individual risk profiles. The Committee has recommended that, in conjunction with a new standardised approach to capital adequacy regulation, an internal ratings based approach could also form the basis for determining regulatory capital charges. The approach would link banks’ credit risk capital requirements to internal credit risk ratings for those institutions with suitably robust and well-developed risk rating systems that are able to meet minimum supervisory standards. 2 The Committee’s recommendation...

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Credit Risk Management - CGI.com

Credit Risk Management Today, maintaining and improving long-term financial health is the name of the game. To satisfy shareholders, positive cash flow—combined with prudent invest- ment, balanced growth, and cost control—is absolutely essential. Enterprise-wide customer management practices and policies have never been more critical. With customer churn on the rise, the drive for market share is no longer the sole business objective. In many organizations, the number of accounts in collections is increasing, resulting in higher operational costs. Rising net bad debt, fraud, write- offs and increasing numbers of days sales outstanding (DSO) are eroding margins. The truth is, all customers are not the same, and a company’s organizational struc- ture and customer strategies and procedures need to reflect these

differences. The key to success is acquiring profitable, high-value customers and retaining them for the long term. Organizations must strike the balance between risk and reward. Risk management— balancing profit potential and customer service with the risks involved in extending credit to a customer—is a critical part of managing the customer life cycle. A credit policy that is too stringent causes customer relationships to suffer; one that is too lax causes profits to suffer. Rapid business benefits founded upon best practices Applying our extensive experience, CGI helps organizations implement integrated credit risk management solutions to achieve rapid business benefits including: • Increased product and customer profitability • Improved collection rates • Reduced net bad debt and operating costs • Enhanced customer management processes • Decreased receivables carrying costs • Improved bottom lines CGI’s holistic approach has been developed for more than 20 years by working with hundreds of industry leaders to envision and implement credit risk management strategies for protecting and improving their financial health. Our approach has three dimensions to minimize credit risk: customer analytics, design of strategies and business processes, and delivery of applicable technology tools. This approach enables a client organization to: • Manage credit risk through the implementation of intelligent credit strategies, work processes, and organizational design • Employ consistent treatment throughout the customer life cycle through the use of statistical techniques and decision analytics • Control operations costs through integration and automation • Invest in technology solutions with strong business cases and an impeccable track record for attaining business goals CGI’s engagements with organizations of all sizes and in different geographies and industries, has produced a credit risk management framework upon which all our work is based. No matter what stage in the credit management life cycle an organi- zation finds itself, CGI can devise an appropriate solution, relying on the best prac- tices most relevant to the desired business results. Sustaining shareholder value by maximizing customer profitability Why CGI Our blend of business expertise, end-to-end offerings, and customer-focused approach helps clients solve their credit risk management challenges. • Business expertise—CGI has 20 years of experience in working with leading credit risk manage- ment organizations worldwide, across industries. • Total solution—CGI provides the consulting services necessary to make operational improvements in credit and collections manage- ment, call centers, and marketing, as well as the software assets that support them. • Customer-based approach— CGI applies a...

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Financial Accounting Series - FASB

Statement of Financial Accounting Standards No. 123 (revised 2004) Share-Based Payment NO. 263-C DECEMBER 2004 Financial Accounting Series Financial Accounting Standards Board of the Financial Accounting Foundation For additional copies of this Statement and information on applicable prices and discount rates contact: Order Department Financial Accounting Standards Board 401 Merritt 7 PO Box 5116 Norwalk, Connecticut 06856-5116 Please ask for our Product Code No. S123R. FINANCIAL ACCOUNTING SERIES (ISSN 0885-9051) is published monthly by the Financial Accounting Foundation. Periodicals—postage paid at Norwalk, CT and at additional mailing offices. The full subscription rate is $175 per year. POSTMASTER: Send address changes to Financial Accounting Standards Board, 401 Merritt 7, PO Box 5116, Norwalk, CT 06856-5116. Summary This Statement is a revision

of FASB Statement No. 123, Accounting for Stock- Based Compensation. This Statement supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. Scope of This Statement This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. This Statement does not change the accounting guidance for share-based payment transactions with parties other than employees provided in Statement 123 as originally issued and EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.” This Statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Posi- tion 93-6, Employers’ Accounting for Employee Stock Ownership Plans. Reasons for Issuing This Statement The principal reasons for issuing this Statement are: a. Addressing concerns of users and others. Users of financial statements, including institutional and individual investors, as well as many other parties expressed to the FASB their concerns that using Opinion 25’s intrinsic value method results in financial statements that do not faithfully represent the economic transactions affecting the issuer, namely, the receipt and consumption of employee services in exchange for equity instruments. Financial statements that do not faithfully represent those economic transactions can distort the issuer’s reported financial condition and results of operations, which can lead to the inappropriate allocation of resources in the capital markets. Part of the FASB’s mission is to improve standards of financial accounting for the benefit of users of financial information. This State- ment addresses users’ and other parties’ concerns by requiring an entity to recognize the cost of employee services received in share-based payment transactions, there- by reflecting the economic consequences of those transactions in the financial statements. i b. Improving the comparability of reported financial information by eliminating alternative accounting methods. Over the last few years, approximately 750 public companies have voluntarily adopted or announced their intention to adopt State- ment 123’s fair-value-based method of accounting for share-based...

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Rollover Risk and Credit Risk - Faculty

jofi˙1721 jofi2009v2.cls (1994/07/13 v1.2u Standard LaTeX document class) December 26, 2011 15:7 JOFI jofi˙1721 Dispatch: December 26, 2011 CE: AFL Journal MSP No. No. of pages: 39 PE: Beetna 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 THE JOURNAL OF FINANCE • VOL. LXVII, NO. 2 • APRIL 2012 Rollover Risk and Credit Risk ZHIGUO HE and WEI XIONG ∗ ABSTRACT Our model shows that deterioration in debt market liquidity leads to an increase in not only liquidity premium of

corporate bonds but also credit risk. The latter effect originates from firms’ debt rollover. When liquidity deterioration causes a firm to suffer losses in rolling over its maturing debt, equity holders bear the losses while maturingdebtholdersarepaidinfull.Thisconflictleadsthefirmtodefaultatahigher fundamental threshold. Our model demonstrates an intricate interaction between liquidity premium and default premium and highlights the role of short-term debt in exacerbating rollover risk. THE YIELD SPREAD OF a firm’s bond relative to the risk-free interest rate directly determines the firm’s debt financing cost, and is often referred to as its credit spread. It is widely recognized that the credit spread reflects not only a default premium determined by the firm’s credit risk but also a liquidity premium due to illiquidity of the secondary debt market (e.g., Longstaff, Mithal, and Neis (2005), and Chen, Lesmond, and Wei (2007)). However, academics and policy makers tend to treat both the default premium and the liquidity premium as independent, and thus ignore interactions between them. The financial crisis of 2007 to 2008 demonstrates the importance of such an interaction— deterioration in debt market liquidity caused severe financing difficulties for many financial firms, which in turn exacerbated their credit risk. In this paper, we develop a theoretical model to analyze the interaction between debt market liquidity and credit risk through so-called rollover risk: when debt market liquidity deteriorates, firms face rollover losses from issuing new bonds to replace maturing bonds. To avoid default, equity holders need to bear the rollover losses, while maturing debt holders are paid in full. This ∗ He is with the University of Chicago, and Xiong is with Princeton University and NBER. An earlier draft of this paper was circulated under the title “Liquidity and Short-term Debt Crises.” We thank Franklin Allen, Jennie Bai, Long Chen, Douglas Diamond, James Dow, Jennifer Huang, Erwan Morellec, Martin Oehmke, Raghu Rajan, Andrew Robinson, Alp Simsek, Hong Kee Sul, S. Viswanathan, Xing Zhou, and seminar participants at Arizona State University, Bank of Portugal Conference on Financial Intermediation, Boston University, Federal Reserve Bank of NewYork, Indiana University, NBER Market Microstructure Meeting, NYU Five Star Conference, 3rd Paul Woolley Conference on Capital Market Dysfunctionality at London School of Economics, Rutgers University, Swiss Finance Institute, Temple University, Washington University, 2010 Western Finance Association Meetings, University of British Columbia, University of California- Berkeley, University of Chicago, University of Oxford, and University of Wisconsin at Madison for helpful comments. We are especially...

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CVaR and Credit Risk Measurement - Edith Cowan University

CVaR and Credit Risk Measurement By Robert J. Powell1 and David E. Allen1 1School of Accounting, Finance and Economics, Edith Cowan University School of Accounting, Finance and Economics & FEMARC Working Paper Series Edith Cowan University August 2009 Working Paper 0905 Correspondence author: Robert J. Powell School of Accounting, Finance and Economics Faculty of Business and Law Edith Cowan University Joondalup, WA 6027 Australia Phone: +618 6304 2439 Fax: +618 6304 5271 Email: r.powell@ecu.edu.au ABSTRACT The link between credit risk and the current financial crisis accentuates the importance of measuring and predicting extreme credit risk. Conditional Value at Risk (CVaR) has become an increasingly popular method for measuring extreme market risk. We apply these CVaR techniques to the measurement of

credit risk and compare the probability of default among Australian sectors prior to and during the financial crisis. An in depth understanding of sectoral risk is vital to Banks to ensure that there is not an overconcentration of credit risk in any sector. This paper demonstrates how CVaR methodology can be applied in different economic circumstances and provides Australian Banks with important insights into extreme sectoral credit risk leading up to and during the financial crisis. Keywords: Conditional Value at Risk (CVaR); Banks; Structural modelling; Probability of default (PD) 1 1. Introduction Value at Risk (VaR) has become an increasingly popular metric for measuring market risk. VaR measures potential losses over a specific time period within a given confidence level. The concept is well understood and widely used. Its popularity escalated when it was incorporated into the Basel Accord as a required measurement for determining capital adequacy for market risk. VaR has also been applied to credit risk through models such as CreditMetrics (Gupton, Finger, & Bhatia, 1997), CreditPortfolioView (Wilson, 1998), and iTransition (Allen & Powell, 2008). Nevertheless, despite its popularity, VaR has certain undesirable mathematical properties; such as lack of sub-additivity and convexity; see the discussion in Arztner et al (1999; 1997). In the case of the standard normal distribution VaR is proportional to the standard deviation and is coherent when based on this distribution but not in other circumstances. The VaR resulting from the combination of two portfolios can be greater than the sum of the risks of the individual portfolios. A further complication is associated with the fact that VaR is difficult to optimize when calculated from scenarios. It can be difficult to resolve as a function of a portfolio position and can exhibit multiple local extrema, which makes it problematic to determine the optimal mix of positions and the VaR of a particular mix. See the discussion of this in Mckay and Keefer (1996) and Mauser and Rosen (1999). Conditional Value at Risk (CVaR) measures extreme returns (those beyond VaR). Allen and Powell (2006; 2007) explored CVaR as an alternative method to VaR for measuring market and credit risk. They found that CVaR yields consistent results to VaR when applied to Australian industry risk rankings, but has the added advantage of measuring extreme returns (those beyond VaR). Pflug (2000) proved that CVaR is a coherent risk measure with a number of desirable properties such as convexity...

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Finance Accounting Undergrad Rotation Brochure

Finance/Accounting Undergraduate Degree Rotation Program The Fox Finance/Accounting Rotation Program is a highly selective program for recent undergraduates with a passion for the entertainment industry, and a strong entrepreneurial desire to test their abilities and enhance their leadership skills. The Program provides an unforgettable first-hand experience allowing participants to work on a variety of assignments and projects in various departments around the company. Brinda S. 2007 Associate, Undergraduate Rotation Program: Current position, Senior Financial Analyst “The Fox Rotation Program has provided me with experience that is truly unique and beneficial to my developing career. Being able to work in two different groups and seeing how they work together has really helped me learn about the finance process. While in the

program, my mentor was there to guide me and offer very valuable career advice. I definitely encourage recent graduates to apply as this work experience is like no other.” A one-year program, which includes salary and benefits. After the Program, the role may lead to a full-time position with Fox. All opportunities are based in Los Angeles. Associates will be part of the Finance team working in various departments which may include Television Distribution, Home Entertainment Distribution, Financial Reporting, Strategic Planning, Theatrical Distribution, Digital Media Finance and Production Finance. Opportunities to build a valuable network of peers, mentors, and leaders across the company. Associates will work on a variety of projects including analysis related to operations for a particular area (e.g. variance analysis, forecast analysis, financial statement analysis, etc.). Research and analysis of data for various projects. Associates may perform general accounting procedures related to month-end accounting (reserves and accruals), account reconciliation, and journal entries. Associates may also generate reports, develop and maintain spreadsheets related to operations for a particular area or function. Overview Program Structure Assignments Deadline to Apply: April 1, 2013 We recruit at top colleges and universities throughout the U.S. For more information and to apply, visit FoxCareers.com.Requisition number FFE0001469. Also, email resume to FoxRotationProgram@fox.com. Application Process Benefits Medical, Dental and Vision Insurance Life Insurance Business Travel Insurance Flexible Spending Account Employee Assistance Program Long Term Disability Insurance  401(k) Vacation, Floating Holidays, Sick Leave Paid Holidays Training and Development Connect With Us! FoxCareers.com We're looking for recent graduates with high potential. You must demonstrate strong communication and leadership skills and be open to exploring a variety of projects. Successful candidates must meet the following minimum qualifications: B.A. in Finance, Accounting or Business Administration with 0-2 years finance/accounting experience. Strong analytical skills, excellent verbal and written communication skills, and a good understanding of analytical tools including Excel, and other financial/accounting programs. Candidate Qualifications...

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Credit Risk Transfer: To Sell or to Insure - Queen's Economics

Credit Risk Transfer: To Sell or to Insure James R. Thompson⁄ Department of Economics, Queen’s University First Version: December 2005 This Version: June 2007 Abstract This paper analyzes credit risk transfer in banking. Speciflcally, we model loan sales and loan insurance (e.g. credit default swaps) as the two instruments of risk transfer. Recent empirical evidence suggests that the adverse selection problem is as relevant in loan insurance as it is in loan sales. Contrary to previous literature, this paper allows for informational asymmetries in both markets. We show how credit risk transfer can achieve optimal investment and minimize the social costs associated with excess risk taking by a bank. Furthermore, we flnd that no separation of loan types can occur

in equilibrium. Our results show that a well capitalized bank will tend to use loan insurance regardless of loan quality in the presence of moral hazard and relationship banking costs of loan sales. Finally, we show that a poorly capitalized bank may be forced into the loan sales market, even in the presence of possibly signiflcant relationship and moral hazard costs that can depress the selling price. Keywords: credit risk transfer, banking, loan sales, loan insurance JEL Classiflcation Numbers: G21, G22, D82. ⁄Address: Dunning Hall, 94 University Ave., Kingston, ON K7L 3N6, Canada, Telephone: 1-613-533-6000 ext. 75955, E-mail: thompsonj@econ.queensu.ca. The author is grateful to Frank Milne, Jano Zabojnik, Thor Koeppl, and Sumon Majumdar as well as Kimmo Berg, Allen Head, Jean-Charles Rochet, seminar participants at Queen’s University and the 2006 CEA Annual Meetings for helpful comments and discussions. 1 Introduction The growth in credit risk transfer (CRT), and speciflcally, credit derivatives since the mid- 90s has been large. Instruments such as bank loans, once virtually illiquid, can now have their risk stripped down and traded away. Indeed, how we view the role of banking institutions is fundamentally changing. The growth in credit derivatives is illustrated in flgure 1, where we see that the notional out- standing value has surpassed $12 trillion. Figure 2 is based on a survey of some of the largest flnancial institutions in the world. The average weekly trading volume for various derivative instru- ments is reported. We see that credit derivatives have overtaken plain vanilla" equity derivatives in options activity for banks. [Figure 1 about here] [Figure 2 about here] Dufiee and Zhou (2001) gave us our flrst insight into the theoretical usage of both credit deriva- tives and loan sales.1 The authors show how credit derivatives can help alleviate the lemons" problem that plagues the loan sales market and that it is possible that the introduction of credit derivatives could shut down the loan sales market. This paper builds on Dufiee and Zhou (2001), but departs from it in two important ways. First, an assumption that is pivotal to their lemons result is that loan insurance is used when no informational asymmetries exist between the bank and the potential insurer. Recent empirical evidence by Acharya et al. (2005) suggests that banks are acting on their privileged information in credit default swaps (loan insurance) markets. In their analysis, they flnd signiflcant information is revealed within these...

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The non-internal model method for capitalising counterparty credit

Basel Committee on Banking Supervision Consultative Document The non-internal model method for capitalising counterparty credit risk exposures Issued for comment by 27 September 2013 June 2013 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2013. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISBN 92-9131-945-7 (print) ISBN 92-9197-945-7 (online) Contents The non-internal model method for capitalising counterparty credit risk exposures ........................................... 1 I. Background ....................................................................................................................................................................... 1 A. Basel III CCR framework ............................................................................................................................................... 1 B. Current non-internal models approaches ............................................................................................................. 1 C. Key objectives in reviewing the non-internal model method ....................................................................... 2 II. Proposed revisions ......................................................................................................................................................... 3 A. Replacement cost and NICA ....................................................................................................................................... 4 B. PFE add-ons ......................................................................................................................................................................

9 C. Time risk horizon ........................................................................................................................................................... 16 D. Recognition of excess collateral and negative mark-to-market ................................................................ 17 E. Aggregation across asset classes ........................................................................................................................... 18 III. Calibration........................................................................................................................................................................ 18 Overview and summary table of proposed add-ons ............................................................................................... 19 IV. Implication for the IMM shortcut method .......................................................................................................... 21 Annex I: Glossary of terms ........................................................................................................................................................... 22 Annex II: Application of the NIMM to sample portfolios ................................................................................................ 24 Annex III: Flow chart of steps to calculate [interest rate] add-on ................................................................................ 32 The non-internal method for capitalising counterparty credit risk exposures iii The non-internal model method for capitalising counterparty credit risk exposures I. Background A. Basel III CCR framework 1. The Basel II counterparty credit risk (CCR) framework for derivatives capitalises against the risk of losses due to counterparties defaulting before meeting all their contractual obligations on bilateral transactions. A two-step process is undertaken to capitalise this risk. First, a bank must calculate the credit exposures arising from bilateral transactions (ie what is likely to be lost when the counterparty 1 defaults), under exposure or Exposure at Default measures (EAD). Second, these EAD calculations enter the credit risk regime and are multiplied by the risk weight of the counterparty according to either the Standardised or the internal ratings based (IRB) approach. 2. The assessment of credit exposures for derivative transactions depends on the bilateral nature of these transactions, fluctuations in their market risk factors (eg prices, volatilities, and correlations) and legal netting sets and collateral agreements. Given these variables, specific and distinct approaches have been designed in the CCR framework to compute the EAD of derivative transactions. Firms can currently choose from three approaches to calculate EAD for derivatives: two non-internal model approaches with different degrees of complexity – the Current Exposure Method (CEM) and the Standardised Method (SM), – and one internal models approach requiring approval from supervisory authorities – the Internal Model Method (IMM). Each of these methods is computed at the netting set level (ie only the derivative transactions with the same counterparty that are subject to a legally enforceable netting arrangement are considered in the calculation of the credit exposures). B. Current non-internal models approaches Current Exposure Method (CEM) 3. The CEM is defined in section VII, Annex IV of the Basel II accord. Under the CEM, the EAD is calculated as the sum of the current market value of the instrument and a potential future exposure (PFE) add-on component that reflects...

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Exhibit I—Excerpts From Financial Accounting Standards

Excerpts From FASB ASC 450 437 AU Section 337B Exhibit I—Excerpts From Financial Accounting Standards Board Accounting Standards Codification 450, Contingencies Source: SAS No. 12. March, 1975. The following excerpts are reprinted with the permission of the Financial Accounting Standards Board (FASB). Overall Overview and Background General 450-10-05-4. The Contingencies Topic establishes standards of financial ac- counting and reporting for loss contingencies and gain contingencies, including standards for disclosures. 450-10-05-5. Resolution of the uncertainty may confirm any of the follow- ing: a. The acquisition of an asset b. The reduction of a liability c. The loss or impairment of an asset d. The incurrence of a liability. 450-10-05-6. Not all uncertainties inherent in the accounting process give 1 rise to

contingencies. Estimates are required in financial statements for many ongoing and recurring activities of an entity. The mere fact that an estimate is involved does not of itself constitute the type of uncertainty referred to in 2 3 the definition of a loss contingency or a gain contingency. Several examples of situations that are not contingencies are included in Section 450-10-55. 1 According to the Financial Accounting Standards Board (FASB) Accounting Standards Cod- ification (ASC) glossary, a contingency is "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur." 2 According to the FASB ASC glossary, a gain contingency is "an existing condition, situation, or set of circumstances involving uncertainty as to possible gain to an entity that will ultimately be resolved when one or more future events occur or fail to occur." 3 According to the FASB ASC glossary, a loss contingency is "an existing condition, situation, or set of circumstances involving uncertainty as to possible loss to an entity that will ultimately be resolved when one or more future events occur or fail to occur. The term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses." AU §337B 438 The Standards of Field Work Loss Contingencies Recognition General General Rule 450-20-25-1. When a loss contingency exists, the likelihood that the future event or events will confirm the loss or impairment of an asset or the incurrence 4 5 of a liability can range from probable to remote. As indicated in the definition of contingency the term loss is used for convenience to include many charges against income that are commonly referred to as expenses and others that are commonly referred to as losses. The Contingencies Topic uses the terms 6 probable, reasonably possible, and remote to identify three areas within that range. 450-20-25-2. An estimated loss from a loss contingency shall be accrued by a charge to income if both of the following conditions are met: a. Information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements. Date of...

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