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Fabrici Management Consulting delivers results that help our Clients to succeed in their work and initiatives.

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We use our expertise and experiences to support our Client's Business to assure their sustainable growth and profit.We serve the Clients with full range of Consulting Services in Strategy, Sales & Marketing, Operations, Risk and Information Technology.

Credit Risk Management

 

Credit risk is the first of all risks in terms of importance. Default risk, a major source of loss, is the risk that customers default, meaning that they fail to comply with their obligations to service debt. Default triggers a total or partial loss of any amount lent to the counterparty. Credit risk is also the risk of a decline in the credit standing of an obliger of the issuer of a bond or stock. Such deterioration does not imply default, but it does imply that the probability of default increases. In the market universe, a deterioration of the credit standing of a borrower does materialize into a loss because it triggers an upward move of the required market yield to compensate the higher risk and triggers a value decline. ‘Issuer’ risk designates the obligors’ credit risk, to make it distinct from the specific risk of a particular issue, among several of the same issuer, depending on the nature of the instrument and its credit mitigants (seniority level and guarantees). The view of credit risk differs for the banking portfolio and the trading portfolio.

The major credit risk components are exposure, likelihood of default, or of a deterioration of the credit standing, and the recoveries under default. Scarcity of data makes the assessment of these components a challenge. Ratings are traditional measures of the credit quality of debts.

Ratings, however, apply only to individual debts of borrowers, and they do not address the organization portfolio risk, which benefits from diversification effects. Portfolio models show that portfolio risk varies across organizations depending on the number of borrowers, the discrepancies in size between exposures and the extent of diversification among types of borrowers, industries and countries. The portfolio credit risk is critical in terms of potential losses and, therefore, for finding out how much capital is required to absorb such losses.

Modelling default probability directly with credit risk models remained a major challenge, not addressed until recent years. A second challenge of credit risk measurement is capturing portfolio effects. Due to the scarcity of data in the case of credit risk, quantifying the diversification effect sounds like a formidable challenge. It requires assessing the joint likelihood of default for any pair of borrowers, which gets higher if their individual risks correlate. Given its importance for financial institutions, it is not surprising that these, regulators and model designers made a lot of effort to better identify the relevant inputs for valuing credit risk and model diversification effects with ‘portfolio models’ via Credit Risk Modeling.

 

 

Hot News

October 2015 - Fabrici Management Consulting has signed a Contract to deliver Enterprise Application Integration for Transpetrol, a.s.

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Septebmer 2015 - Fabrici Management Consulting has signed a Consulting Contract with Poštová Banka, a.s.

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