Corporate Financing


Credit Risk, Rating, Pricing, and Regulation

di: Giacomo De Laurentis, Vincenzo Farina

Editore
Bancaria Editrice
Anno
2025
Pagine
130
ISBN
978-88-449-1332-8
Disponibilità
Disponibile
Prezzo di copertina€ 26,00
Prezzo Internet Sconto 5% € 24,70
IVA assolta dall'editore

Presentazione

By merging banks’ CLOs/CROs and corporates’ CFOs perspectives, the book provides an overview of concepts, measures, tools and policies that are at the heart of bank lending and corporate borrowing decision making processes. The key question to address is: how to borrow enough at low prices? There are many ways to reach this goal. We will assume, as a backbone, corporate borrowing from banks. Borrowing from financial markets and alternative approaches to corporate borrowing (such as project financing, object financing, and the like) will be considered by comparison.

Therefore, the book will cover the following three critical topics and their interconnections:

  1. how credit risk management works in banks, and how risk measures are used;
  2. the link between corporate finance and corporate creditworthiness;
  3. how banking regulations affect size and price of bank lending.

In the first part (chapters 1-4), by a simple pragmatic approach, concepts and measure of credit risk will be clarified: default risk (and probability of default, PD), severity risk (and loss given default, LGD), exposure risk (and exposure at default, EAD), migration risk, spread risk, concentration risk, expected and unexpected losses (and value at risk, VaR). Among the tools that produce these measures, special insights will be devoted to agencies’ ratings and statistical-based rating systems used by banks. Some clues will be given on market-implied ratings, that is those ratings derived from financial markets (bond, CDS and equity markets). Among the applications of these measures and tools, special interest will be dedicated to loan pricing and risk-adjusted performance measures of lending (such as Raroc, Eva and the like), loan approval limits rationale, and the link with accounting regulations of banks’ credit losses provisions.

In the second part (chapters 5-7), corporate profitability of a typical Equity Approach analysis will be related with the weighted average cost of capital of a typical Entity Approach analysis. Key similarities and differences will emerge, clarifying why it is essential for lenders to properly use the former, and for corporate CFOs to correctly use the latter. It is commonly said that “cash is king”, but the lenders focus is (and must be) on profit, that is king’s father. And often on business sector and company strategy, that are king’s grandfather. In the third part (chapters 8-9), prudential regulations (up to Basel 3+/4) will be analysed for their implications on bank lending and for corporate borrowers’ decisions.

Finally, the interconnections of creditworthiness assessment in banks’ lending departments and rating approval in banks’ risk management departments will be outlined, discussing the degree of consistency between different banks’ regulations and management needs, and their implications for old and new models of bank-firm relations (such as commodity-oriented banking, instant lending, smart lending, asset-based lending, relationship-oriented banking).

Introduction
1. Credit risk management map and a first insight into default risk
1.1 An overview of the credit risk management framework
1.2 Default risk and borrowers/issuers ratings
1.3 Ratings performance and validation
2. Agencies’ and internal ratings. Judgement-based and statistical-based ratings
2.1 Types of credit ratings and rating processes
2.2 Raison d’etre of agencies’ ratings
2.3 The rating assignment process of agencies’ ratings
2.4 Statistical-based rating assignment processes
3. Other concepts, measures and tools of credit risks
3.1 Severity risk and exposure risk from the expected values perspective
3.2 Default-Mode Approach from the unexpected value perspective
3.3 Mark-to-Market Mode
4. Loan pricing and other applications of credit risk measures
5. Credit selection. Cash is king, but profit is king’s father
5.1 The role of corporate profitability in bank lending: the regulatory and macro-economic perspectives
5.2 The role of corporate profitability in bank lending: the management perspective
5.3 The role of financial ratio analysis in corporates’ creditworthiness assessment
5.4 The additive formula of Roe in some other approaches
6. Equity Approach (profitability analysis) versus Entity Approach (Wacc) in Finance
6.1 Economic sustainability of corporate debt and optimal firm’s capital structure from the Equity Approach point of view
6.2 Equity Approach (Roe formula) versus Entity Approach (Wacc)
6.2.1 The Entity Approach in capital budgeting
6.2.2 Equity Approach and Entity Approach: so different, yet so similar
6.3 Entity Approach and risk-adjusted pricing framework: so different, yet so similar
7. Corporate financial analysis and the interaction between financial and operating leverage
7.1 Roa and opRoa analyses
7.2 Ros analysis
7.3 Operating asset turnover analysis
7.4 Operating leverage
7.4.1 Definitions
7.4.2 Operating leverage (income statement component): impact on %∆Ebit
7.4.3 Operating leverage (balance sheet component): impact on %∆opAssets
7.4.4 Overall operating leverage: impact on %∆opRoa
7.5 The interaction between operating and financial leverage
7.6 Financial and operating leverage and the rating agencies’ analytical framework
8. Corporate financing within the broader context of banking regulations and perceived risks for banks’ stability
8.1 Real economy needs, banking regulations objectives, financial markets innovations: what are leading what?
8.2 From structural supervision to Basel I prudential supervision
8.3 Basel II
8.4 The 2007-08 financial crisis
8.5 Basel III
8.6 Basel 3+
8.7 Final thoughts on what are leading what, and impacts of regulations on banks and corporate borrowers
9. Conclusions
9.1 The productive relationship between regulation and ratings established by Basel II
9.2 Contradictions in Basel II leading to future problems
9.3 Alignments and contradictory relationships of Eba Lom with Basel II on Internal Ratings
9.3.1 The consistency of Eba Lom with Basel II
9.3.2 The contradictions of Eba Lom with Basel II
9.3.3 The Eba Lom, credit pricing, and ratings: a managerial trap?
9.4 Contradictions with Basel II in supervisory practices
9.5 The dangerous relationship between rating and Basel 3+/Crr3
9.6 Outlook
Bibliography