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Chapter 12 Credit Risk Loan Portfolios.docx

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FIN 701
Patricia Mc Graw

FIN701 Financial Institutions Management CHAPTER 12 Credit Risk: Loan Portfolios SIMPLE MODELS OF LOAN CONCENTRATION RISK  Two simple models to measure credit risk concentration in the loan portfolio 1. Migration analysis – method to measure loan concentration risk by tracking credit ratings of firms in particular sectors or ratings class for unusual declines  Loan migration matrix – measure of probability of a loan being upgraded, downgraded, or defaulting over some period o Used as benchmark against which the credit migration patterns of any new pool of loans can be compared o Rows lists rating at which the portfolio of loans began the year; columns list rating at which portfolio ended the year o Transitional probabilities reflect the average experience (proportions) of loans that began the year 2. Concentration limits – external limits set on the maximum loan size that can be made o an individual borrower  Proportion of loan portfolio that can go to any single customer by assessing the borrower’s current portfolio, its operating unit’s business plan, its economists’ economic projections, and its strategic plans  Large exposure limits – maximum amo
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