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Coping With Credit Risk
Year Of Publication: 2004
Month Of Publication: January
Pages: 26
Download Count: 780
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Comment Num: 0
Language: EN
Source:
Who Can Read: Free
Date: 5-21-2005
Publisher: Administrator
Summary
We consider a pool of bank loans subject to a credit risk and develop a method for decomposingthe credit risk into idiosyncratic and systematic components. The systematic componentaccounts for the aggregate statistical difference between credit defaults in a given period and thelong-run average of these defaults. We show how financial contracts might be redesigned toallow for banks to manage the idiosyncratic component for their own accounts, while allowingthe systematic component to be handled separately. The systematic component can be retained,passed off to the capital markets, or shared with the borrower. In the latter case, we introduce atype of floating rate interest, in which the rate is set in arrears, based on a composite index forthe systematic risk. This is shown to increase the efficiency of risk sharing between borrowers,lenders and the capital market.
Author(s)
Loubergé, Henri Sign in to follow this author
Schlesinger, Harris Sign in to follow this author
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