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.
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).
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.
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. The main challenge is finding data on new origination dynamics over time.
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.
Traditional approaches to modeling economic capital, credit-VaR, or structured instruments whose underlying collateral is comprised of structured instruments treat structured instruments as a single-name credit instrument i.e., a loan-equivalent). While tractable, the loan-equivalent approach requires appropriate parameterization to achieve a reasonable description of the cross correlation between the structured instrument and the rest of the portfolio. This article provides an overview of how one can calibrate loan-equivalent correlation parameters. Results from taking the approach to the data suggest that structured instruments have far higher correlation parameters than single-name instruments.