Hello. My name is Tracy Williams. I will be the instructor of this course in credit risk management. This is an introduction to credit risk management, but we're going to cover many different topics. Most of you, when you think of credit risk, one of the first things you're thinking about is that I am an institution, I make a loan, and then what is the risk of non-payment? Traditionally, let's think of this as loan exposure, for which we lend to a corporate borrower, and then what is the risk of non-performance and what is the risk of non-payment? When it's a loan, we usually talking about the amortization of principal payments and also interests. In this course, we'll talk about the probability of non-performance and non-payment as relates to loans, loan exposure in terms of principal and interest payments. Credit risks actually goes beyond just loan exposure. We will cover that in this course. Credit risk can also arise as a result, if when we buy a corporate bond. Corporates issue bonds to fund themselves and they also make interest and principal payments. It even goes beyond bonds and loans because it also means counterparty credit risk. This is where two institutions, maybe a bank, maybe a corporate they engage in financial transactions, could be a derivative transaction, could be an interest rate swap. There's credit risks in a financial transaction when there is the risk or a probability of non-performance in that type of transaction. In this course, we will define what credit risk is, the different types of credit risks, different forms of credit risk, different structures. We'll try to understand how does it arise and the forms of exposures, outstandings. There's also what we call a credit risk commitment, a requirement, a contractual requirement into a credit-related transaction. We think of that commonly, a bank enters into a revolving credit agreement with a corporate client. Even though we don't fund the loan initially, there's a contractual commitment for the bank to provide the funds. Of course, there is also contractual commitment on the borrower to pay principal and interests as scheduled. We'll go through some basic topics of credit risks. When we say basic topics and concepts, I have mentioned, there's the risk of non-performance, there is a probability of a default. What is a default? When a counterpart doesn't meet what it's required. What actually happens when there is a default? Is there is a remedy? What steps do we take if there is a default? Also in this course, we'll look at credit markets, will look at trends, especially over the past year, where we had a global recession and we were going through the pandemic. We'll take a peek about what's been going on in credit markets. How do credit markets measure credit risk? Then bring us to the point that we are right now. Lastly, what we'll also do is cover portfolio risk management. This is not looking at a single name, this is looking at a multitude of names. Not one loan in the portfolio, not the analysis of one loan, but the analysis of a portfolio. We try to detect credit risk in the portfolio and we'll go over some basic concepts and approaches to how do we detect credit risk in the portfolio and also quantify that risk? Then we'll, in this particular course, in a discussion of reducing credit race, we call that credit risk mitigation. How do we actually go about reducing, eliminating, transferring credit risk? We'll go through the methods and common approaches that are related to that. First, let's walk through some of the lessons and some of the outlines that we're going to take, especially as it pertains to Module 1. On the screen here as I had said, this course, we'll go through three modules. Module 1; mostly principles and concepts, Module 2; this is where we're looking at trends in the marketplace. We'll also look at what is called market indicators. That's where we look at bond markets, derivatives markets, credit markets, equity markets, and try to get some sense of their perceptions of credit risk as it relates to certain names, certain borrowers, and counterparties in the marketplace. As credit analysts and that's got credit risk managers, we do analysis, we look for signs of deterioration, but we also can take a peek in terms of the perceptions of the marketplace and to at least look for consistency. Is there consistency in how we're looking at a particular bar or a particular name? Then in Module 3, we'll cover portfolio management. In the objectives, I'm going to go through this very quickly. We're going to a, we're going to try to understand some of the conventional concepts of risk management. There will be a concept of what we call expected loss and unexpected loss. When we talk about credit risk, we do talk frequently about what is the probability of non-performance? What's the probability that the company cannot pay that interest on time? What's the probability that they cannot meet a principal payment on time? Of course, I said through the marketplace, will look at market indicators, will introduce the concept also of credit default and credit deterioration. A credit default relates to nonpayment specific nonperformance. Credit deterioration looks at over a period of time thus the borrower or a counterparty is its financial condition withering. Is it deteriorating so that its probability of non-performance or probability of default is increasing over that period of time? Hasn't default it yet but the probability of what is the deterioration, we usually call that migration of credit risk from a stable state to a worse state. We will introduce this concept called credit var. This is credit value at risk and that is tied to credit deterioration. That is one metric of trying to measure how much can we lose? What is the potential loss in a portfolio as there is not to default, but to deterioration? As I had mentioned that we're going to go through portfolio risk management. How do we detect the risk and then also how can we mitigate that risk in terms of reducing exposure? Now when we, we're also going to go through, want to make sure that we talk about the different types of risk. I've been talking about loan exposure but there's loan exposure, there's committed exposure, there's counterparty credit rates exposure and there's something called settlement exposure. We'll go through the different categories of risks and then we'll try to define them. Any type of exposure could very likely be mapped to one of these general categories and how do we analyze exposure is also linked not just to the probability of default but the type of exposure that we have as well. Then we'll talk about and we'll introduce the concept of structuring exposure. Is it collateralized or non-collateralized? Is it secure or nonsecure? Is it long-term exposure? Is it short-term? Is it senior or junior? Let's talk about that concept, senior versus junior. That relates to when there's a liquidation or an [inaudible] solvency, how will the company use its scarce resources to pay out what's due? That's usually based on a ranking, seniority, junior, and subordination. As we had mentioned, that what we're going to do is we're going to try to quantify credit risks as much as possible. Module 1, concepts and principles that is highlighted here. Module 2, default trends and market indicators and those are the topics that we will cover. Then Module 3 is credit portfolio management.
