ICM239-Credit Risk

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Level:7
Terms in which taught: Spring term module
Pre-requisites:
Non-modular pre-requisites:
Co-requisites:
Modules excluded:
Current from: 2023/4

Module Convenor: Dr Simone Varotto
Email: s.varotto@icmacentre.ac.uk

Type of module:

Summary module description:

This module introduces students to a set of techniques to measure and manage credit risk in banks. It covers recent developments in credit risk regulation in the banking sector.�� Financial press articles are extensively used to provide context and show the relevance of the teaching material to current risk management issues. Retail, corporate and sovereign credit risks and their interactions with other financial risks are explored with practical examples. Students are exposed to popular portfolio models used by risk managers and central banks.

Aims:

The course focuses on (1) risk management lessons from past financial crises (2) alternative risk metrics (value-at-risk vs expected shortfall) (3) default, migration and recovery risk, (4) credit ratings, credit scoring models, spread implied ratings and default probability models, (5) how to measure portfolio credit risk using contingent claim and credit rating-based approaches (6) credit risk management tools and (7) credit risk capital regulation (Basel II and Basel III).

Assessable learning outcomes:

By the end of the module it is expected that students will be able to :

• Explain the relationship between capital and risk


• Explain credit risk capital regulation


• Be able to apply Value-at-Risk and expected shortfall techniques to portfolios of credit risk sensitive instruments


• Be able to derive and use credit ratings and credit scores


• Know how to estimate a credit loss distribution and use it f orrisk management purposes


• Explain the main features and implementation of JP Morgan’s CreditMetrics and the Moody’s-KMV model


• Be able to use risk management tools such as Component VaR and Best Hedge calculated with and without distributional assumptions


• Explain the concept and implementation of stress testing in credit risk portfolios

Additional outcomes:

The module offers students the chance to work together to develop team-building and presentation skills.

Outline content:

1. Financial crises and current issues in risk management

2. Value-at-risk and expected shortfall

3. Economic and Regulatory capital. Basel requirements.

4. Determinants of credit risk:

1. Default probability


2. Recovery rate


3. Exposure at default

5. Credit risk assessment

1. Retail vs commercial credit risk


2. Agency ratings


3. Spread implied ratings


4. Credit scoring models: Altman Z-score


5. Default probability models

6. Credit portfolio models

1. Transition matrices and time horizon


2. CreditMetrics


3. Moody's-KMV

Global context:

The module covers international financial crises, international bank regulation and risk measurement techniques that are common in large banks worldwide.

Brief description of teaching and learning methods:

The core theory and concepts will be presented during lectures. Problem sets will be solved in workshops.

Summative assessment- Examinations:

Summative assessment- Coursework and in-class tests:

Students will be required to submit a group project on several topics related to credit risk measurement in week 1-3 of the summer term.

Two multiple choice tests of 1 hour each in week 9-11 of the spring term and week 1-3 of the summer term.

Formative assessment methods:

Multiple choice tests

Penalties for late submission:

The below information applies to students on taught programmes except those on Postgraduate Flexible programmes. Penalties for late submission, and the associated procedures, which apply to Postgraduate Flexible programmes are specified in the policy “Penalties for late submission for Postgraduate Flexible programmes”, which can be found here:��/cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmissionpgflexible.pdf

The Support Centres will apply the following penalties for work submitted late:

• where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of five working days;


• where the piece of work is submitted more than five working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

The University policy statement on penalties for late submission can be found at:��/cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmission.pdf

You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Assessment requirements for a pass:
50% overall grade

Reassessment arrangements:
By individual project.

Additional Costs (specified where applicable):

Required text books: £71.21

Last updated: 5 April 2023