Credit Risk Measurement and Management
Credit risk is the potential for a borrower or a counterparty to a transaction to be unable or unwilling to satisfy its obligation.
Rutter Associates since its inception has been active in supporting the measurement and management of credit risk exposures for its clients looking to: minimize or transfer credit risk that is an unwelcomed byproduct of their operations in a cost-efficient manner; or to maximize risk-adjusted return from active credit risk taking activities subject to maintaining sufficient capital resources to withstand all but the most improbable of adverse credit events.
In a sense our founder Charles Smithson “wrote the book” on Credit Portfolio Management (1ed. Wiley, 2003). Rutter Associates played a seminal role in the creation of the International Association of Credit Portfolio Managers (IACPM) having provided organizational guidance and infrastructure for the organization’s first year and participated in the drafting and editing of its “Sound Practices in Credit Portfolio Management”.
While working in banking and insurance before joining Rutter Associates, our partners had decades of direct experience in measuring and managing derivative counterparty risk, single-name and portfolio credit risk, and credit risk pooled in securitization structures such as Credit Linked Notes, Collateralized Loan Obligations, and private label Residential Mortgage-Backed Securities. This experience informs our work with clients on a daily basis.
Representative assignments include:
• Rutter Associates created a portfolio credit risk model for a guarantor seeking to re-emerge after the 2007-2009 financial crisis and has evaluated the credit portfolio loss models of other guarantors in runoff at the behest of their respective regulators.
• Rutter Associates built a portfolio credit risk and risk-adjusted return model for a start-up venture aimed at providing credit insurance to banking institutions.
• Rutter Associates evaluated the Merton-style and reduced form models used by a number of U.S. Banks and Investment Firms to estimate default probability, exposure at default and loss given default for Executive Managements and Boards of Directors.
• Rutter Associates has advised Banks in the U.S. and abroad in the selection of the most firm-appropriate methods for modeling economic capital for credit risk.
• Rutter Associates was engaged by a large European bank to evaluate the model used to estimate the probability distribution of future credit losses in its portfolio of asset-backed securities.
• Rutter Associates performed a Best Practices Survey of Credit Portfolio Management Practices and assisted in the development of resources for use in communicating Credit Portfolio Management Practices to stakeholders.
• Rutter Associates has calculated derivative counterparty credit risk exposures and credit valuation adjustments for numerous clients and numerous derivative portfolios over the past decade.