ICM239-Credit Risk

Module Provider: ICMA Centre
Number of credits: 20 [10 ECTS credits]
Terms in which taught: Spring term module
Non-modular pre-requisites:
Modules excluded:
Current from: 2018/9

Module Convenor: Dr Simone Varotto

Email: s.varotto@icmacentre.ac.uk

Type of module:

Summary module description:

This module introduces students to a set of techniques to measure and manage credit risk in banks. It covers recent developments in credit risk regulation in the banking sector.  Financial press articles are extensively used to provide context and show the relevance of the teaching material to current risk management issues. Retail, corporate and sovereign credit risks and their interactions with other financial risks are explored with practical examples. Students are exposed to popular portfolio models and stress testing frameworks used by risk managers and central banks.


The course focuses on (1) risk management lessons from past financial crises (2) alternative risk metrics (value-at-risk vs expected shortfall) (3) default, migration and recovery risk, (4) credit ratings, credit scoring models, spread implied ratings and default probability models, (5) how to measure portfolio credit risk using contingent claim and credit rating based approaches (6) credit risk management tools (7) credit risk capital regulation (Basel II and Basel III) and (8) stress testing.

Assessable learning outcomes:

By the end of the module it is expected that students will:

Understand the relationship between capital and risk;

Be familiar with credit risk capital regulation; 

Be able to apply Value-at-Risk and expected shortfall techniques to portfolios of credit risk sensitive instruments;

Be able to derive and use credit ratings and credit scores;

Know how to estimate a credit loss distribution and use it for risk management purposes;

Understand the main features and implementation of JP Morgan’s CreditMetrics and the Moody’s-KMV model 

Be able to use risk management tools such as Component VaR and Best Hedge calculated with and without distributional assumptions

Be familiar with the concept and implementation of stress testing in credit risk portfolios

Additional outcomes:
The module offers students the chance to work together to develop team-building and presentation skills

Outline content:

1. Financial crises and current issues in risk management

2. Value-at-risk and expected shortfall

3. Economic and Regulatory capital. Basel requirements.

4. Determinants of credit risk:

  • Default probability

  • Recovery rate

  • Exposure at default

5. Credit risk assessment

  • Retail vs commercial credit risk

  • Agency ratings

  • Spread implied ratings

  • Credit scoring models: Altman Z-score

  • Default probability models

6. Credit portfolio models

  • Transition matrices and time horizon

  • CreditMetrics

  • Moody's-KMV

7. Credit Risk Management Tools

8. Stress Testing

Brief description of teaching and learning methods:
The core theory and concepts will be presented during lectures. Problem sets will be solved in workshops.

Contact hours:
  Autumn Spring Summer
Lectures 20
Tutorials 10
Guided independent study 170
Total hours by term 200.00
Total hours for module 200.00

Summative Assessment Methods:
Method Percentage
Report 40
Class test administered by School 60

Summative assessment- Examinations:

Students will be required to submit a group project on several topics related to credit risk management by week 34.

Summative assessment- Coursework and in-class tests:

2 multiple choice tests of 1 hour in week 9 of the spring term and week 1 of the summer term

Formative assessment methods:

Penalties for late submission:
Penalties for late submission on this module are in accordance with the University policy. Please refer to page 5 of the Postgraduate Guide to Assessment for further information: http://www.reading.ac.uk/internal/exams/student/exa-guidePG.aspx

Assessment requirements for a pass:
50% overall grade

Reassessment arrangements:
By individual project.

Additional Costs (specified where applicable):

1) Required text books: 14. ICM239 - Credit Risk Hull, J. C. (2015) “Risk Management and Financial Institutions, 4th ed.”, Wiley Finance. ISBN-10: 1118955943, ISBN-13: 978-1118955949 Price: £65.99. 2) Specialist equipment or materials: 3) Specialist clothing, footwear or headgear: 4) Printing and binding: 5) Computers and devices with a particular specification: 6) Travel, accommodation and subsistence:

Last updated: 1 August 2018


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