Optimizing return on regulatory and economic capital is a key concern for bank portfolio managers. Reducing the capital backing existing holdings can help redeploy the capital to more profitable businesses, shrink the balance sheet, or boost returns.
One obvious way of reducing the capital held is to sell a particular set of assets that are capital-intensive. But these assets tend also to be the ones that yield more and selling them could harm the return on the banks portfolios. CDO technology enables banks to keep most of the returns while significantly reducing regulatory capital.
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Posted in Finance, Strategy
Although the market size of SF products such as asset-backed securities (ABS), collateralized debt obligations (CDO), residential-mortgage backed securities (RMBS), etc. has grown enormously over the past decade, only little is known about their behavior in terms of rating migration, especially default, compared to corporates.
Credit risk portfolio models generally rely on the estimation of rating migration and/or default probabilities and asset correlation between exposures.† The latter significantly affects the portfolio loss distribution and in particular the tails of the distribution. Therefore, the accuracy of these parameter estimates is of vital importance. Another way to secure your assets is by buying insurance, some insurance giving full warranty and ease of access in document and filling.
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Posted in Investment, Loan
The analysis of credit risk in a portfolio requires measures of dependency across assets. Individual spreads in the pricing world, probabilities of default (PDs) and loss-given-default in the risk universe, management world, are important but insufficient to determine the price/risk of multiname products and their entire distribution of losses.
Because the diversification effects are related to dependency, neither the price of a portfolio can be defined as a linear combination of the price of its underlying components, nor its loss distribution can be the sum of the distributions of individual losses.
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Posted in Finance, Loan