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December 2016

Portfolio risk analysis of structured instruments requires a suitable representation of the instrument calibrated to match tranche-level quantitative measures of risk. Such quantitative risk measures are hard to find; ratings are sticky, coarse, and hard to translate to quantitative risk measures, and analysis of structured instruments under one or a few prescribed scenarios cannot provide accurate tranche-level risk measures.

Utilizing Moody’s Analytics tranche simulations and their accurate measures of tranche risk, we have developed methodologies to represent structured instruments in the RiskFrontier software as a collateralized debt obligation (CDO) or a bond equivalent for the purpose of computing portfolio credit value at risk (VaR) and economic capital (EC).

Related Insights

What Do 20 Million C&I Loan Observations Say about New Origination Dynamics? — Insights from Moody's Analytics CRD Data

We construct and examine new origination of C&I loans to middle-market borrowers using the Loan Accounting System data extracted from Moody's Analytics Credit Research Database (CRD/LAS). We find that C&I loan origination declines during the Great Recession and recovers soon after. The magnitude of the decline and the speed of the recovery varies across segments. For example, new lending to the financial industry decreases more than to the non-financial industry during the recession and recovers faster afterwards. Another example, new originations during the recession consists predominantly of short-term loans, while long-term lending becomes more dominant post crisis. This finding suggests that banks are using loan tenor as a means to mitigate risk during crises, at times even more so than credit quality.

February 2017 Pdf Dr. Pierre Xu, Tomer Yahalom, May Jeng

Using Loan Accounting System Data to Model New Origination

Modeling new origination is important for forecasting the future dynamics of a portfolio, and it is becoming prevalent for banks to use these models for capital and risk management, stress testing, and strategic planning. In recent years regulators have laid out stress testing frameworks that focus on modeling the relationship between new origination and the macro environment. The main challenge with modeling new origination is finding data on new origination dynamics over time.

October 2016 WebPage Tomer Yahalom

Stress Testing a Securities Portfolio with Spread Risk and Loss Recognition

This paper introduces a framework for stress testing portfolios of credit risk sensitive securities. Specifically, the framework uses a macroeconomic scenario to project stressed expected losses (EL) on the securities by accounting for credit quality changes, recovery risk effects, fluctuations in market price of risk, and interest rates paths. The calculations are carried out analytically over multiple periods.

April 2016 Pdf Sunny Kanugo, Vishal Mangla, Libor Pospisil, Dr. Yashan Wang, Kevin Yang, Ian Ward, Jay Harvey