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FINANCIAL MARKET COURSES

Credit Risk – Measurement & Capital Requirements

The financial crisis demonstrated that banks, as well as some nonbank financial institutions such as insurance companies, did not fully understand the size and nature of the risks that they were exposed to. While accurate measurement of credit risk is a non-trivial task, the conceptual framework itself is fairly intuitive. There are three critical parameters in determining the level of credit risk – exposure at default (EAD), probability of default (PD), and loss given default (LGD).

 

This course describes these parameters and how they are used to calculate the expected loss (EL) of a credit portfolio. EAD, PD, and LGD are also the main factors in determining regulatory capital requirements for credit risk under Basel III. The course outlines how capital requirements are based around the concept of unexpected loss (UL), which is a function of EL for a credit portfolio.

  • OBJECTIVES

    On completion of this course, you will be able to:

    Describe the main inputs into the credit risk measurement process

    Explain why banks require capital to cover unexpected credit losses and the minimum regulatory requirements in this regard

  • COURSE OUTLINE

    Topic 1: Measuring Credit Risk

    Inputs

    o Exposure at Default (EAD)

    o Loss Given Default (LGD)

    o Probability of Default (PD)

    Expected Loss (EL)

    Unexpected Loss (UL)

    EL/UL & Capital

    Credit Risk Management Using EL: Attractions

    Credit Risk Management Using EL: Issues

    Topic 2: Credit Risk Lifecycle

    The Need for Capital

    How Much Capital is Required?

    Capital Plans

    Capital Adequacy Ratio (CAR)

    o Minimum CAR

    Qualifying Capital

    Capital Tiers & Minimum Ratios

  • PREREQUISITE KNOWLEDGE

  • ESTIMATED COMPLETED TIME

    60 Minutes

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