ICM239: Credit Risk

Module code: ICM239

Module provider: ICMA Centre; Henley Business School

Credits: 20

Level: Postgraduate Masters

When you'll be taught: Semester 2

Module convenor: Professor Simone Varotto, email: s.varotto@icmacentre.ac.uk

Pre-requisite module(s):

Co-requisite module(s):

Pre-requisite or Co-requisite module(s):

Module(s) excluded:

Placement information: NA

Academic year: 2024/5

Available to visiting students: No

Talis reading list: No

Last updated: 28 May 2024

Overview

Module aims and purpose

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 credit risk portfolio models used by risk managers and central banks.

Module learning outcomes

By the end of the module, it is expected that students will be able to: 

• Explain how financial and economic crises are linked to credit risk in financial institutions; 
• Explain how credit risk is regulated and managed in banks; 
• Derive and use credit ratings and apply Value-at-Risk and Expected Shortfall techniques to portfolios of credit risk exposures; 
• Explain the main features and implementation of JPMorgan’s CreditMetrics and the Moody’s-KMV model and how they can be used for stress testing in credit risk portfolios.

Module content

1. Financial/economic 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: 

     a. Default probability 

     b. Recovery rate 

     c. Exposure at default

5. Credit risk assessment 

     a. Retail vs commercial credit risk 

     b. Agency ratings 

     c. Spread implied ratings 

     d. Credit scoring models: Altman Z-score 

     e. Default probability models 

6. Credit portfolio models 

     a.Transition matrices and time horizon 

     b.CreditMetrics 

     c. Moody's-KMV 

7. Credit Risk Management Tools

Structure

Teaching and learning methods

The core theory and concepts will be presented during lectures. Problem sets will be solved in workshops.

Study hours

At least 32 hours of scheduled teaching and learning activities will be delivered in person, with the remaining hours for scheduled and self-scheduled teaching and learning activities delivered either in person or online. You will receive further details about how these hours will be delivered before the start of the module.

Please note the independent study hours above are notional numbers of hours; each student will approach studying in different ways. We would advise you to reflect on your learning and the number of hours you are allocating to these tasks.

Semester 1 The hours in this column may include hours during the Christmas holiday period.

Semester 2 The hours in this column may include hours during the Easter holiday period.

Summer The hours in this column will take place during the summer holidays and may be at the start and/or end of the module.

Assessment

Requirements for a pass

50% overall grade

Summative assessment

Penalties for late submission of summative assessment

The Support Centres will apply the following penalties for work submitted late:

Assessments with numerical marks

• where the piece of work is submitted after the original deadline (or any formally agreed extension to the deadline): 10% of the total marks available for that piece of work will be deducted from the mark for each working day (or part thereof) following the deadline up to a total of three working days;
• the mark awarded due to the imposition of the penalty shall not fall below the threshold pass mark, namely 40% in the case of modules at Levels 4-6 (i.e. undergraduate modules for Parts 1-3) and 50% in the case of Level 7 modules offered as part of an Integrated Masters or taught postgraduate degree programme;
• where the piece of work is awarded a mark below the threshold pass mark prior to any penalty being imposed, and is submitted up to three working days after the original deadline (or any formally agreed extension to the deadline), no penalty shall be imposed;
• where the piece of work is submitted more than three working days after the original deadline (or any formally agreed extension to the deadline): a mark of zero will be recorded.

Assessments marked Pass/Fail

• where the piece of work is submitted within three working days of the deadline (or any formally agreed extension of the deadline): no penalty will be applied;
• where the piece of work is submitted more than three working days after the original deadline (or any formally agreed extension of the deadline): a grade of Fail will be awarded.

The University policy statement on penalties for late submission can be found at: https://www.reading.ac.uk/cqsd/-/media/project/functions/cqsd/documents/qap/penaltiesforlatesubmission.pdf

You are strongly advised to ensure that coursework is submitted by the relevant deadline. You should note that it is advisable to submit work in an unfinished state rather than to fail to submit any work.

Formative assessment

Formative assessment is any task or activity which creates feedback (or feedforward) for you about your learning, but which does not contribute towards your overall module mark.

Multiple choice tests

Reassessment

Additional costs