Credit risk is the risk of financial loss due to an unexpected deterioration of counterparty’s credit quality. Credit risk has played a significant role in the majority of financial crises to date, which makes it a very important risk to be able to measure and manage.

Credit risk management starts with an assessment of credit quality (i.e. rating, probability of default, loss given default) and credit exposure at the counterparty level. Sound single-name credit risk measurement is the necessary foundation stone for building institution wide credit risk measurement and management methodologies.

ITS Universal Credit Risk

By using the ITS Universal Credit Risk module, the following elements can be considered and analyzed:

1. Risk mitigation techniques considered include close-out netting, collateral and guarantees. Both, collateral and a guarantee, can be given for one specific exposure or for all the exposures of a given counterparty. A given contract can have any number of pieces of collateral (or guarantees). This gives the financial institution the freedom to model any contract structure, whether from the corporate, trading or retail business. Close-out netting is also recognized.
2. Credit lines are included in the analysis. The expected usage of the undrawn part of the credit line can be modeled.
3. Besides assets, off-balance sheet positions, that have positive replacement value, are integrated in the credit risk computations. Netting agreements and positions with a negative replacement value are also included in the exposure computation.
4. The counterparty structure allows drill down to the individual subsidiaries of an organization. The full legal structure can be implemented with distinction between branches and legally independent subsidiaries. Subsidiaries can be consolidated based on the percentage ownership. Flexible analysis by country is also available.
5. Consistency between market and credit risk analysis is guaranteed through the following aspects:

1. Credit risk factors for Credit VaR can be the same or form a subset of market risk factors.
2. Scenarios for the potential exposure calculation can be taken directly from the market risk scenario simulation
   

 

3. Financial Product / Instrument Coverage: All credit exposure calculations are applied consistently for any type of financial product/instrument from deposits to exotic options. Specific instruments for credit risk include collateral, guarantees, credit lines, credit line opening, credit default swaps, total return swaps and credit spread options.

ITS Universal Credit Risk module provides single name and portfolio credit risk analysis by means of three components:

• Current and Potential Exposure
• Expected (Credit) Loss
• Credit Value at Risk