Corporate Credit Risk Analysis

Credit market innovations have resulted in corporate credit risk being spread more broadly across a variety of risk takers. They have made it possible to trade and price credit risk, offering greater opportunities to manage and hedge it. A broad, deep and well-functioning capital market, complemented by a well capitalized banking system that can provide liquidity in time of stress, represents a more efficient financial system than one dependent on banks alone. 

Research on corporate credit risk modeling for privately-held firms is limited because of the lack of public data and currently we define corporate credit risk analysis as a formulation that explains the credit criteria and debt rating methodology that is applied to commercial and industrial companies.

One of the biggest trends in corporate banking has been the emergence of credit trading. The common view, to which I generally subscribe, is that this has made individual banks and the banking system as a whole safer. But on passage of time, financial markets went under fluctuations and shifts in patterns and practices. So nowadays I sense that the lingering concern is whether the credit trading market itself is robust enough to function smoothly in a severe downturn?. Will the apparently greater diversification of credit risk created by an originate-and-distribute approach to the corporate banking business continue to function smoothly under stress?  Regulatory concern about sloppy operational processes in the credit derivative market is largely motivated by its importance for stability of the banking system as a whole.

Managing Credit Risk will now emerge as a greatest challenges for the corporate banks and other financial institutions to manage the credit risk, and I feel the folowing will be the most potent ones:

Supporting a portfolio view of risk (both strategically and tactically.)

Defining and assessing the impact of potential stress events for both market risk and credit risk.

Harnessing the emerging potential of parallel processing via grid computing technology.

Ability to create and maintain a flexible data infrastructure to respond to the constantly changing data requirements for modeling and reporting of risks and exposures

Reference data management solutions to enable increasingly diverse financial institutions to meet individual department/divisional needs while allowing aggregation and centralized analysis in a consistent manner.

Clearly there is no definitive answer as to how serious a risk is implicit in the operational fabric of the credit derivatives market.  Nevertheless, I am interested in your views on how much progress has been made since regulators began emphasizing the issue.  If you know of formal studies that have attempted to assess the impact of credit trading on systemic risk of the corporate banking system, these also would be interesting.