Advanced Credit Risk Management notes




This paper is intended to equip the candidate with knowledge, skills and attitudes that will enable him/her to evaluate and manage credit portfolio risk using the proven tools and methods and advise management regarding optimal credit portfolio and credit risk diversification.


A candidate who passes this paper should be able to:

  • Apply the principles of credit portfolio risk management in identification, measurement and management of major credit portfolio risks
  • Relate firm risks to portfolio risks and capital adequacy.
  • Mitigate credit exposure using various securities in covering credit obligations exposure.
  • Advise the management regarding the optimal lending, product-wise, for a profitable credit portfolio (Credit portfolio risk vs. Return).
  • Employ risk diversification, trading of credit assets and credit derivatives in mitigating credit portfolio risk.
  • Establish and implement the organization’s overall credit risk management plan.



1.            Introduction to Credit Portfolio Management (CPM)

1.1       Credit portfolio vs. Equity portfolio (Criticality of Credit Portfolio Risks)

1.2       Benefits of credit portfolio management

1.3       Role of credit portfolio management: Credit department; – veto rights, advisory or profit Centre

1.4       Portfolio management strategies – Passive Vs Active CPM

1.5       Portfolio analysis

1.6       Challenges of implementation of Active Credit portfolio management

1.7       Credit portfolio risk vs. Return


2.          Major portfolio risks

2.1       Systematic Risk (triggers and consequences)

2.2       Diversifiable risk

2.3       Concentration risk

2.4       Credit portfolio beta

2.5       Measuring credit portfolio risk


3.            Credit Risk in Working Capital

3.1       Working capital cycle (Lenders’ point of view)

3.2       Working capital vs. Fixed capital

3.3       Working capital financing

3.4       Working capital ratios

3.5       Working capital behavior

3.6       Working capital risks (Overtrading, diversion, inflation and contingencies) and their impact

3.7       Working capital risks mitigations




4.            Credit Risk in Project Finance

4.1       Overview of project finance (features and types of project finance)

4.2       Phases of projects and risks

4.3       Project credit risks

4.4       Financial study (cash flow forecasts, economic worth and credit worthiness)

4.5       Mitigating project credit risks


5.            Firm Risks to Portfolio Risks and Capital Adequacy

5.1       Obligor probability of default (PD) and portfolio probability of default

5.2       Default risk (Firm level defaults and portfolio defaults)

5.3       Loss given default (LGD) and expected loss (EL)

5.4       Provisioning (firm level and portfolio-level)

5.5       Credit loss distribution

5.6       Economic Capital (measurement and optimisation)


6.            Credit Risk Pricing

6.1       Credit pricing factors

6.2       The pricing structure

6.3       Origination of credit risk

6.4       Credit risk pricing models

6.5       Prime lending rates (Base rate and KBRR)

6.6       Pricing methods (RORAC, NPV, RANPV)


7.            Credit Risk Modelling

7.1       Introduction to Credit Portfolio Models.

7.2       Basic statistics for risk management: Volatility, correlation, VaR, Monte Carlo simulation, Copula functions in modelling default correlation.

7.3       Merton Model, Moody’s KMV, Credit Metrics, One-period Portfolio Models, Gaussian Models etc

7.4       Alternative modelling approaches: Default models and mark to market / multi-state models, Structural and reduced form models

7.5       Conditional and unconditional models

7.6       Scenario and sensitivity analysis in CPM


8.            Credit Risk and the Basal Accords and Prudential Guidelines in Lending

8.1       Regulatory framework

8.2       Basal I and its criticism

8.3       Alternative approaches for credit risk in Basal II

8.4       Risk Weighted Assets and Capital adequacy (Basal vs. Prudential Guidelines)

8.5       Criticism of Basal II

8.6       Credit risk measurement and management under Basal III

8.7       Basal III and prevention of future financial/credit crises

8.8       Managing nonperforming assets/loans under prudential guidelines (CBK)

8.9       IFRS 9 and management of accounts receivables

8.10     Towards Basel IV: Rationale and Regulatory compliance enhancement proposals


9.            Credit Portfolio Risk Mitigation

9.1       Credit risk diversification (traditional and modern diversification)

9.2       Trading of credit assets

9.3       Credit derivatives

9.4       Credit Insurance

9.6       Best practices and principles of credit portfolio management as per the International Association of Credit Portfolio Managers (IACPM) framework


10.          Collateral Management

10.1     Security basics overview (need, attributes, types and pricing)

10.2     Methods of taking security and perfection of securities

10.3     Covenants (financial and nonfinancial)

10.4     Realising security

10.5     Credit risk management planning and strategy


11.          Credit Portfolio Management and Credit Crisis

11.1     Road to credit crisis (role of banks, formation of credit bubbles, credit bubble explosion)

11.2     2008 Credit crisis (causes and consequences)

11.3     Lessons of the 2008 credit crisis


12.          Analysis of Case Studies

12.1     Practical business scenarios on credit exposure management – entity level exposures and portfolio credit exposures and credit risk management planning

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