| The Bank for International Settlements is only 1-2
years away from effectively requiring all major financial institutions
in the world to use a sophisticated credit models. The most widely used
model is based on the 1974 Merton model of risky debt. A more recent
extension of the Merton model of risky debt is the Shimko, Tejima and
van Deventer (1993) model, which allows for simultaneous analysis of
credit risk and interest rate risk. Increasingly, however, bankers are
turning to a newer class of models call "reduced form credit models"
because of their analytical power for both complex derivatives like
credit derivatives and the mark to market of loans on a credit adjusted
basis. The Basel Capital Accords place a heavy emphasis on financial
institutions' ability to assess credit risk. In this book, two of the
world's best-known risk management experts assess both the Merton model
and reduced form credit models and show exactly how to measure model
performance as the Basel Accords require. They use the same tests to
assess the likely effectiveness of the Basel Capital Accords in
measuring the safety and soundness of financial institutions. The
authors go into great detail in assessing the ability of leading credit
models to evaluate collateralized debt obligations, loan commitments,
collateralized loans, and retail and small business loan portfolios as
well.
Credit Risk Models and the Basel Accords reviews the objectives of
the credit risk management process, introduce the theory of the Merton
and reduced form credit models, show how the models can be used in
practice, and then examines a wide range of historical data to show the
relative performance of the models in practice.
- This is the first book devoted to a balanced review of the newer
reduced form models and the older Merton model!
- It is an invaluable guide for financial institutions striving to
meet the requirements of the new Basel Accord.
- It is a book that thoroughly reviews the pros and all the cons of
both classes of credit models. The Basel Accords that financial
institutions do more than just "have" a model—they must understand how
well they work, and this book is focused on that requirement of the
new Basel Accords.
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Credit
Risk Models and the Basel Accords
