Managing Credit Risk: The Next Great Financial Challenge

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The first full analysis of the latest advances in managing credit risk.

"Against a backdrop of radical industry evolution, the authors of Managing Credit Risk: The Next Great Financial Challenge provide a concise and practical overview of these dramatic market and technical developments in a book which is destined to become a standard reference in the field." -Thomas C. Wilson, Partner, McKinsey & Company, Inc.

"Managing Credit Risk is an outstanding intellectual achievement. The authors have provided investors a comprehensive view of the state of credit analysis at the end of the millennium." -Martin S. Fridson, Financial Analysts Journal.

"This book provides a comprehensive review of credit risk management that should be compulsory reading for not only those who are responsible for such risk but also for financial analysts and investors. An important addition to a significant but neglected subject." -B.J. Ranson, Senior Vice-President, Portfolio Management, Bank of Montreal.

The phenomenal growth of the credit markets has spawned a powerful array of new instruments for managing credit risk, but until now there has been no single source of information and commentary on them. In Managing Credit Risk, three highly regarded professionals in the field have-for the first time-gathered state-of-the-art information on the tools, techniques, and vehicles available today for managing credit risk. Throughout the book they emphasize the actual practice of managing credit risk, and draw on the experience of leading experts who have successfully implemented credit risk solutions.

Starting with a lucid analysis of recent sweeping changes in the U.S. and global financial markets, this comprehensive resource documents the credit explosion and its remarkable opportunities-as well as its potentially devastating dangers. Analyzing the problems that have occurred during its growth period-S&L failures, business failures, bond and loan defaults, derivatives debacles-and the solutions that have enabled the credit market to continue expanding, Managing Credit Risk examines the major players and institutional settings for credit risk, including banks, insurance companies, pension funds, exchanges, clearinghouses, and rating agencies. By carefully delineating the different perspectives of each of these groups with respect to credit risk, this unique resource offers a comprehensive guide to the rapidly changing marketplace for credit products.

Managing Credit Risk describes all the major credit risk management tools with regard to their strengths and weaknesses, their fitness to specific financial situations, and their effectiveness. The instruments covered in each of these detailed sections include: credit risk models based on accounting data and market values; models based on stock price; consumer finance models; models for small business; models for real estate, emerging market corporations, and financial institutions; country risk models; and more. There is an important analysis of default results on corporate bonds and loans, and credit rating migration. In all cases, the authors emphasize that success will go to those firms that employ the right tools and create the right kind of risk culture within their organizations. A strong concluding chapter integrates emerging trends in the financial markets with the new methods in the context of the overall credit environment.

Concise, authoritative, and lucidly written, Managing Credit Risk is essential reading for bankers, regulators, and financial market professionals who face the great new challenges-and promising rewards-of credit risk management.

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The ideas are great. I wish it had been written just after the greatest global financial meltdown which is known to have been caused by credit default in the US mortgage industry. however, the book gives us a fair idea of the credit risk environment a decade or two before the 2000s.


Financial Markets
Credit Culture
Classic Industry PlayersBanks Finance Companies Insurance Companies Industrial Companies
Portfolio ManagersInvestment Managers Unit Trusts Mutual Funds Pension Funds
Derivative Dealers Clearinghouses and Exchanges
Rating Agencies
Classic Credit Analysis
Default Rates Losses and Recoveries
Credit Risk Migration
Introduction to Portfolio Approaches
Credit Pricing RiskAdjusted Return and Allocation of Capital
Applications of Portfolio Approaches
Credit Derivatives
Credit Risk of Derivatives
Country Risk Models

AssetBased Lending
Introduction to Credit Risk Models
Credit Risk Models Based on Accounting Data
Corporate Credit Risk Models Based on Stock Price
Consumer Finance Models
Credit Models for Small Business Real Estate and Financial Institutions
Testing and Implementation of Credit Risk Models
Structured Finance
A New World Driven by Analytics and Diversifying Agents
The Rediscovery of Culture as a Primary Management Tool
Sources of Information for Credit Risk

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About the author (1998)

JOHN B. CAOUETTE is President of the Structured Finance Division of MBIA Insurance Corporation. He was formerly Chairman and CEO of Capital Markets Assurance Corporation.

EDWARD I. ALTMAN is the Max Heine Professor of Finance at New York University Stern School of Business and Vice Director of its Salomon Center. His previous publications include Corporate Bankruptcy in America and Corporate Finance and Bankruptcy (Wiley).

PAUL NARAYANAN is a credit and financial risk consultant who has worked in risk management at Chase Manhattan Bank, BankBoston, and Meritor PSFS. He is cobuilder of the Zeta model and has designed and implemented risk models for consumer, residential, and corporate sectors.

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