Lecture15 - 10/28/2010 MGMT 4370 / MGMT 7760 Risk...

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10/28/2010 1 MGMT 4370 / MGMT 7760 Risk Management Aparna Gupta Lally School of Management and Technology Office: PITTS 2104 Email: guptaa@rpi.edu Phone: x2757 Commercial Credit Risk • Commercial Credit - broad range of instruments – Traditional corporate loans, commercial loans – Corporate bonds – Commitments and letters of credit – Fixed income instruments Commercial contracts such as trade credits and Commercial contracts, such as, trade credits and receivables • Obligors are complex entities – governments (national to municipal), corporations, financial and non-financial institutions Differentiating features of Commercial Credit Risk Commercial credit exposure is NOT bite-sized, therefore default of a single customer can threaten a bank’s solvency. Commercial customers may not be financially independent of each other -- they are often economically intertwined in particular geographical or industry sectors. In commercial credit the unexpected loss dominates the In commercial credit, the unexpected loss dominates the credit risk exposure, so pricing it in is not feasible. Commercial credit, unlike retail credit, does not show signals in advance for occurrence of default or change in creditworthiness. Commercial banks need to make extra effort to assess their credit-risk exposure. Assessing Commercial Credit Risk Assessing commercial risk is a complicated task – There are many uncertain elements determining likelihood of default and how costly a default will turn out to be Many different approaches exist to address the problem. – Newest ones use equity market data to track likelihood of default of public companies Others work at the portfolio level to assess credit risk using Others work at the portfolio level to assess credit risk using mathematical and statistical techniques (as in Insurance). The traditional approach is based on a Credit Rating System – like the Credit Scoring Methodology in Retail Credit. Two agencies have lead the scene for over a century – Moody’s (from 1906), Standard and Poor’s (from 1916) Moody’s and Standard and Poor’s have access to corporation’s internal information, which they use for generating the Ratings.
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This note was uploaded on 01/27/2011 for the course MGMT 4370 taught by Professor Gupta during the Fall '10 term at Rensselaer Polytechnic Institute.

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Lecture15 - 10/28/2010 MGMT 4370 / MGMT 7760 Risk...

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