8.30
Registration and breakfast

9.00
MODELLING DEFAULT RISK USING ASSET AND SPREAD BASED APPROACHES
• Structured models
• Merton model
– assumptions and limitations
– term structure and credit spreads
– empirical evidence
– recovery rates and absolute priority
• Extensions of Merton model: ‘freeing up’ the default boundary
• Longstaff-Schwartz model
• Saa-Requejo-Santa Clara
• Modelling bankruptcy as a decision: Leland model
• Spread based models
• Longstaff-Schwartz
Dr Philipp Shönbucher
DEPARTMENT OF STATISTICS, UNIVERSITY OF BONN

10.30
Morning break

11.00
PRACTICAL APPLICATION OF A TRANSITION MATRIX MODEL FOR MODELLING PORTFOLIO CREDIT RISK
• Jarrow-Lando-Turnbull approach
– arbitrage-free framework
– using the transition matrix to measure the effect of asset dynamics on default risk
– risk adjusting the transition matrix
– fitting the term structure of credit spreads
Dr Philipp Shönbucher
DEPARTMENT OF STATISTICS, UNIVERSITY OF BONN

12.30
Lunch

1.30
REDUCED FORM MODELS
• Jarrow-Turnbull model
• Duffie-Singleton model
• Madan-Unal model
• Separating timing and recovery risks
• Zhang model for coupon bonds

MODELLING DEFAULT CORRELATION FOR PORTFOLIO CREDIT RISK MEASUREMENT
• Linkages between market variables and default probability
• Implicit recovery rate assumptions
• Noise extraction and missing data techniques
• Default probability dynamics: stationarity and normality
• Correlation and factor structure of default-prone baskets
• Impact of maturity on correlation matrix
• Aggregation of credit-risk process: implication for estimation and modelling
• Stress events and correlated jump process
Dr Philipp Shönbucher
DEPARTMENT OF STATISTICS, UNIVERSITY OF BONN

3.00
Afternoon break

3.30
PRACTICAL APPLICATION / BANK PERSPECTIVE OF CREDIT THEORY TO MODEL CREDIT RISK
• Risk-Adjusted Return on Capital (RAROC)
– default probabilities and correlations from previous theory are inputs to this model
– generate the portfolio loan loss distribution
– assign capital by treating the bank as a collateralised loan obligation
• BIS regulatory rules as an alternative model of loan risk-return
– advantages and disadvantages of the 1988 Basle Capital Accord
– return on regulatory risk capital as a risk-return measurement
– potential BIS improvements
• Adding shareholder value
– definition of shareholder value
– examples for enhancing shareholder value with credit derivatives
– net income is not the correct measure of bank performance
• Next generation bank business model
– banks exist to use relationships to earn above-market returns on the credit risk they bear
– credit departments become portfolio managers that never reject a borrower’s credit
Joseph Pimbley
Senior Vice President
SUMITOMO BANK CAPITAL MARKETS

5.00
End of seminar