For liquid credit risks, market-leading banks have already moved away from the classical buy-and-hold paradigm towards Active Credit Portfolio Management (ACPM). Today, this trend also applies to semi-liquid and even illiquid credit portfolios. The ACPM approach enables a more profitable management of credit risks, based on a risk/return-oriented active management of tailor-made hedging and investment measures with a focus on economic risk transfer, diversification, capital efficiency and profitable leverage.
Written by a team of authors working in Credit Suisse's Credit Portfolio Management Unit in Zurich, this book offers you invaluable real-life insights into this developing area of credit portfolio management. It presents you with the latest thinking about ACPM, starting with a discussion of the various organisational frameworks and potential mandates for an ACPM unit, explaining mathematical concepts underlying portfolio management activities, elaborating investment and hedging cases and corresponding business cases and finally ending with fresh thoughts on the so-called ‘cost-to-securitise’ as a valuable component in a pricing framework for illiquid credit risks. This hands-on guide provides you with:
A set of goals and measurable achievements for your ACPM efforts;
A solid self-contained quantitative toolkit needed for your daily business of credit portfolio management, applicable to portfolio analysis as well as in hedging and investment decision-making;
A range of techniques used by major banks in modern credit portfolio management including new and not widely known techniques such as a pricing component based on the so-called 'cost-to-securitise';
Learning points including challenges and 'words of caution' based on real-life experience gained by the team of authors in their daily business;
Tips for dealing with common problems associated with active credit portfolio management;
Special guidance on the treatment of illiquid credit portfolios.
The book is recommended reading for anyone actively managing credit portfolios, especially portfolio managers in banks and other financial institutions such as insurance companies and funds. It will be of interest to anyone involved in credit management including credit traders in investment banks and risk managers. Nevertheless, the chapters are structured in such a way that readers currently lacking a background in portfolio management or credit risk will quickly get to grips with these topics. The book will also serve as a valuable reference for academics interested in current developments in ACPM.
1 An Introduction to Active Credit Portfolio Management
1.1 Motivation and Value Levers of ACPM
1.2 Mandate, Roles and Organisation of ACPM
1.3 Tools and Instruments of ACPM
1.4 Challenges in ACPM
2 Mathematical Modelling in Credit Portfolio Management
2.1 Single-Name Credit Risk Measurement
2.2 Modelling Portfolio Loss
2.3 Portfolio and Facility Risk Measures
2.4 One Step Beyond the Normal World
2.5 Modelling Nth-to-Default Baskets
3 Example Calculations
3.1 Example Model
3.2 Example Portfolio
3.3 Portfolio Steering
4 Performance Benchmarking in Credit Portfolio Management
4.1 Return on Regulatory and Economic Capital
4.2 Portfolio Benchmarking
4.3 Business Case Analysis and Economic Benchmarking
5 Active Management of Credit Risk Short Positions
5.2 Hedging Single-Name Credit Risk
5.3 Hedging with Portfolio-Referenced Correlation Products
6 Active Management of Credit Risk Long Positions
6.2 Evaluation of Single-Name Credit Risk
6.3 Evaluation of Structured Credit Portfolios: Reinvestment in CMBS Tranches
7 Case Study: CLOCK Finance No. 1 (CLO, March 2007)
7.1 Motivation and Benefits
7.2 Transaction Characteristics
7.3 Business Case
7.4 Reference Portfolio Characteristics
7.5 Project Overview
8 Cost-to-Securitise: Transfer Pricing of Illiquid Credit Risks
8.1 Basic Concept
8.2 CLO Sample Portfolio and Dependency on Market Conditions
Dr. Stefan Benvegnù heads the Portfolio Credit Risk Measurement & Steering sector at Credit Suisse in Zurich. He finished his Diploma in Theoretical Physics at the University of Karlsruhe and holds a PhD in Mathematics from the University of Bochum. In 1997, he started in the financial sector and changed to the credit methodology division at Deutsche Bank in 1999 where his main duties comprised portfolio modelling and structured credit products. Since 2005 he has worked in Credit Suisse's Credit Portfolio Management unit.
Dr. Christian Bluhm heads the Credit Portfolio Management unit of Credit Suisse's Credit Risk Management department in Zurich. Prior to that he was responsible for Structured Finance Analytics (CDOs, ABS, RMBS, etc.) in HypoVereinsbank's Group Credit Portfolio Management in Munich. He started his banking career in the Credit Risk Analytics department of Deutsche Bank. Before that he worked in mathematical research at different Universities in Germany and at Cornell University in New York. He holds a diploma and a PhD in mathematics and co-authored three text books on credit risk modelling and structured credit products.
Jens Erler is Senior Credit Portfolio Manager at Credit Suisse. Prior to his position at Credit Suisse he worked in market risk and credit risk departments at Bayerische Landesbank in Munich. He holds a diploma in business mathematics from the University of Leipzig.
Dr. Bernd Hofmann is Senior Credit Portfolio Manager in the Credit Portfolio Consulting group of Credit Risk Management at Credit Suisse (CS) in Zurich. He holds a Master of Business Research, MBR and a PhD in Finance from the Munich School of Management. He recently coauthored a book on instruments and methods for credit risk transfer.
Dr. Carsten Knecht is Senior Credit Portfolio Manager in the Credit Portfolio Analytics group of Credit Risk Management at Credit Suisse (CS) in Zurich. He holds a diploma in physics and a PhD in theoretical physics from the University of Mainz.
Christoph Müller heads the Credit Portfolio Consulting Team at Credit Suisse in Zurich. His main duties are the evaluation and implementation of value adding risk transfer measures for optimising the credit portfolio's risk/return profile. Before joining Credit Suisse in 2004 he worked for three years in the Credit Portfolio Management group at UBS AG in Zurich. He started as a credit analyst for regional banks in Germany. He finished his Diploma in Business Administration at the Black Forest University Villingen-Schwenningen and is a CFA Charterholder.
Dr. Kai Rudolph is Senior Credit Portfolio Manager at Credit Suisse in Zurich. Prior to joining Credit Suisse in 2005 he worked for the Department of Banking at the University of Münster where he examined in his dissertation the impact of bargaining power in financial contracting. Further to his PhD he holds a MSc in Economics and Finance from the Warwick Business School and a Diploma in Economics from the University of Konstanz.
Dr. Anna Schneebeli is Senior Credit Portfolio Manager in the Credit Portfolio Analytics group of Credit Risk Management at Credit Suisse in Zurich. She holds a MSc in mathematics from the Federal Institute of Technology (ETH) in Zurich and a PhD in numerical analysis from the University of Basel.