Credit Risk Research Papers

The paper considers a pool of bank loans subject to a credit risk and develops a method for decomposing the credit risk into idiosyncratic and systematic components.

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The paper also illustrates the potential benefits of risk decomposition.

Of course, as with any innovation, the implementation of the structured contracts would raise practical issues not addressed here.

In the latter case, the paper introduces a type of floating interest rate, in which the rate is set in arrears, based on a composite index for the systematic risk.

This increases the efficiency of risk sharing between borrowers, lenders and the capital market.

For smaller or less sophisticated banks, supervisors need to determine that the credit risk management approach used is sufficient for their activities and that they have instilled sufficient risk-return discipline in their credit risk management processes.

The Committee stipulates in Sections II to VI of the paper, principles for banking supervisory authorities to apply in assessing bank's credit risk management systems.

These comments have informed the production of this final version of the paper.

See in particular Supervisory Guidance for Managing Settlement Risk in Foreign Exchange Transactions (September 2000), in which the annotated bibliography (annex 3) provides a list of publications related to various settlement risks.

The present study shows that, under certain conditions, such an approach may harm financial stability, and thus calls for further reflection on the structure of securitization transactions and portfolio insurance.

While financial institutions have faced difficulties over the years for a multitude of reasons, the major cause of serious banking problems continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to changes in economic or other circumstances that can lead to a deterioration in the credit standing of a bank's counterparties.


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