(1) Impact on default risk (probability of default)
According to the "Default Record in a Weak Economy and Low-Quality Credit (2001)" published by Standard & Poor's in 2002 From the data in Table 16 in the report "Record Defaults in 2001 the Result Of Poor Credit Quality and a Weak Economy", we can understand the impact of credit period on default risk.
The information reported by Standard & Poor's is based on the changes in the S&P issuer ratings of 9,769 corporate bond issuers from January 1, 1981 to December 31, 2001 (see table 1).
As can be seen from Table 1, for all rated customers, the probability of default increases with the extension of the credit period. For customers below BBB (that is, companies with speculative levels), banks are generally unwilling to grant long-term credit. Because banks face relatively high default risks, and in the face of fierce competition and the failure of banks to accurately price risks, it is difficult to charge high-risk customers reasonably high prices to balance this risk.
The average net interest margin of bank credit business is generally 2%-3%. According to the Hong Kong Monetary Authority, the average net interest margin of the Hong Kong banking industry in 2000 and 2001 was 2.14% and 2.14% respectively. 2.03%. According to risk management theory, a bank's foreseeable losses should be covered by interest income and general reserves. Therefore, assuming that a bank grants credit with priority claim rights, the loss in the event of default is generally 0.45. Then, if the average net interest margin is less than 3%, if banks want to rely on interest income to cover foreseeable losses, the PD of corporate customers should not be higher than 6.67% (3%/0.45=6. 67%. Because EL=EAD×PD×LGD, assuming EAD is 1 US dollar, PD=EL/LGD). Therefore, for customers below BBB, if a bank provides loans with a term of more than 3 years, according to the possibility of default, the price level required by the bank after adjusting its risk level will be much higher than the average interest spread level (according to Table 1, The PD of enterprises below BBB level at the end of the fourth year is at least 7.65%). For example, if a bank considers an 8-year credit application from a B-level customer, assume that the LGD is 0.45 (according to the provisions of the New Capital Accord, even if there is a full mortgage of residential or office property, the LGD cannot be lower than 0.35) . According to the default probability in Table 1, the PD of a B-class enterprise at the end of the eighth year is 26.11%. Therefore, if the bank hopes to cover the foreseeable loss with interest income, it needs to charge 26.11% × 45% = 11. 75% of the net interest income can cover EL (even for BB-level customers, according to the above assumptions, a net interest margin of 6.4% must be charged to cover foreseeable losses with net interest income). In a highly competitive market, especially when other banks fail to accurately quantify and price risks, the bank often has difficulty obtaining such high prices, but for lower prices, the bank understands that the risks are not commensurate with the returns. . The bank can only take two countermeasures: not to join the competition; or to put aside risk pricing and join the competition based on cost as the bottom line. This appears to be a form of "herd pressure." In a market environment where most banks are willing to make concessions and sacrifices without clear knowledge of their clients' reasonable risk pricing, banks with the ability to accurately price risk must have sufficient courage or other sources of profit to stick to their principles. Companies with investment ratings (BBB and above) can often raise funds in the capital market by issuing bonds (for medium and long-term financing needs, investment-grade companies make more use of the capital market to obtain more favorable prices and be more flexible) financing methods). In addition, since bonds have a relatively liquid secondary market, banks that purchase bonds can buffer part of the risk due to maturity by selling them in the market at any time or using derivatives (for example, when a bank anticipates the issuance of a bond A person may be exposed to downgrade risk and can mitigate or eliminate the risk by selling his bonds). Therefore, companies that make bilateral loans to banks tend to have speculative ratings. This is also one of the reasons why some banks have stricter control over credit extensions of more than 5 years.
(2) The impact of the credit period on the credit risk caused by the deterioration of customer credit (probability Of downward credit quality migraUons short Of defaln)
This means that the enterprise has not breached the contract , but the credit risk caused by the downgrade of the rating due to deterioration in financial situation and repayment ability. According to the New Capital Accord, the credit period mainly affects the risk weight of credit assets of different periods and their economic capital through its impact on such credit risks. For example, for Company A, when the company defaulted in June 2002, for the bank that granted it a 1-year loan, or the bank that granted it a 7-year loan, as long as the bank loan was not recovered before the company defaulted, the loan would be in different years. All loans with a certain maturity period are also subject to the risk of default losses. However, for the second type of non-default credit risk (that is, the credit risk caused by a decline in customer ratings), the impact of the credit period is obviously different. For example, when Company A's rating drops from BBB to BB, the price decline of its 10-year credit facility is much higher than the price decline of its 1-year credit facility. Because when a company's credit deteriorates, the risk-adjusted price required by the bank will increase, and the credit spread will widen. For the company's debt, a higher discount rate/discount rate is used to calculate the present value of the debt. The longer the maturity of the debt, the greater the decline in its present value.
If a bank grants a short-term credit to a customer and the customer's credit deteriorates, the bank may require the customer to provide credit when applying for a new credit or rolling over an existing credit, provided that the risk is acceptable. Higher prices to maintain risk-adjusted return levels. However, if a bank grants a long-term credit to a customer, the bank loses this flexibility and can only face this type of credit risk in the absence of a secondary market or low liquidity in the market.
According to the above provisions of the New Capital Accord, when banks measure the impact of the credit term on credit risk, they should not only consider the impact of the credit term on the default risk, but also consider the impact of the credit term on the borrower company throughout the loan. The impact of tenor default rate/rating changes and their corresponding interest changes and credit/bond present value. Therefore, the New Capital Accord clearly stipulates that when banks consider the impact of credit terms on credit risks, they must consider the above two types of impacts and cannot only consider the impact on default risks in a narrow sense. Therefore, when banks select risk models, they must consider whether they meet the requirements of the New Capital Accord for credit terms. Among the more commonly used risk models in the market, CreditRisk+ is not an MTM model, but a DM model, which only considers default risk in a narrow sense; while MTM models include KMV's Portfolio Manager, CreditMetrics, etc.
The following uses some data from CreditMetrics’ technical support documents to illustrate the impact of the credit period on the second type of credit risk.
Suppose the bank grants two credits/bonds to a BBB-level corporate customer, one is a 2-year credit/bond of 1 million yuan, and the other is a 5-year credit/bond of 1 million yuan. Assume that the interest rate charged by the bank for credit to this BBB-rated company is 5% (this is a simple assumption made for the convenience of calculation. Generally speaking, the interest rate charged by banks for long-term credit is higher than that for short- and medium-term credit). It is charged at the end of each year. Interest is 50,000 yuan. In addition, it is assumed that the company's rating is likely to be downgraded to BB by the end of the first year.
Using the following data from CreditMetrics' technical support document, assume that the discount rate/discount rate shown by the 1-year forward zero curve (example one-year forward zero curves by credit rating eategory) is as follows: As shown in Table 2.
Table 2 Discount rate/discount rate (%) shown by the one-year forward zero-coupon yield curve Rating Year 1 Year 2 Year 3 Year 4 BBB 4.01 4.67 5.25 5.63 BB 5.55 6.02 6.78 7.27 Using the information in Table 2, we can calculate the changes in the credit value of the two credits granted by the bank to the company at the end of the first year.
The value of the 2-year credit facility granted to the company at the end of year 1 is:
Assuming that the rating of the BBB-rated company is reduced to BB at the end of year 1, the bank application is applicable to The discount rate/discount rate shown by the 1-year forward zero-coupon yield curve of the BB-rated company is 5.55% to calculate the value of the 2-year credit/bond at the end of the first year, that is
Value=105/(1+5, 55%)=99.48 (ten thousand yuan)
The value of the 5-year credit granted to the company at the end of the first year is: Assume that the BBB company has If the rating at the end of year 1 is downgraded to BB, the bank will use the discount rate/discount rate shown in the 1-year forward zero-coupon yield curve applicable to BB-rated companies to calculate the value of the 5-year credit/bond at the end of year 1. That is
Value=5/(1+5.55%)+5/(1+6.02%)2 +5/(1+6.78%)3 +105/(1十 7.27%)4 =4.737+4.448+4.107+79.30=92.59 (10,000 yuan)
As can be seen from the above example, when the rating of corporate customers drops At that time, the long-term credit value granted by the bank to the customer will decline more than the short-term credit value, and the bank will suffer greater losses. In addition, banks are less flexible. For example, for short-term credit, the bank can withdraw the credit when it expires. For new credit granted to the enterprise, the bank can set a higher price based on the BB level. However, for long-term credit, the bank can only charge BBB-level preferential prices to this BB-level customer in the remaining four years. The risk-adjusted income charged by the bank is obviously unreasonably low. As the interest charges charged by banks for such credit facilities may not be sufficient to cover their losses/risks. If the bank's general reserves are not enough to cover the losses caused by such risks, the bank will need some economic capital to cover part of the risks, as will be explained in detail below. The New Capital Accord has the following clear adjustment methods when explaining the impact of credit period on the risk weight and capital of bank credit assets.
The maturity adjustments to the risk weights (derived from MTM-models) based on the credit period obtained from the MTM model are shown in Table 3.
According to Table 3, for a 1-year credit facility with a PD of 0.03%, the risk weight is 0.4 times that of a 3-year credit facility with a PD of 0.03%. The risk weight of a 7-year credit facility with a PD of 0.03% is 2.3 times that of a 3-year credit facility with a PD of 0.03%. Therefore, for banks that need to measure the impact of credit terms on risk weights and capital, credit terms play an important regulatory role.
Under the MTM model, for loans with relatively low default risk in the narrow sense, but relatively high risks due to company credit/rating deterioration, the credit period affects the risk of credit to such companies. Weights have a greater impact with economic/risk capital. That is, for companies with lower PD (i.e., better risk ratings), the credit period plays a more important regulating role in risk weight and economic capital. This is because the credit period mainly plays its role in the risk weight of credit and economic capital through its impact on the second type of risk.
For companies with high ratings and low PD, their default risks are relatively low, while the second type of risks are relatively high, especially when the credit period is longer, their credit/ratings will deteriorate. The higher the possibility. When this second type of risk is higher, the effect of credit period on risk weight and economic capital is more obvious. Therefore, the credit period plays a more important regulating role in the risk weight and economic capital of medium- and long-term credit for such companies.
Compared with companies with high ratings, companies with low ratings are more likely to default. For example, companies rated CCC and B are likely to default if their creditworthiness deteriorates further. For this type of company, the first type of risk is high, while the second type of risk is relatively low. Therefore, the grant period plays a very small role in regulating the risk weight and economic capital of this type of credit. The most extreme example is that when a CCC-rated company is certain to default within one year, then the first type of risk is 100% and the second type of risk is zero. Since banks generally rely on interest rate income and reserves to cover foreseeable losses, banks do not use economic capital to cover losses that can be predicted with certainty.
So for this kind of credit that can be predicted to default, there is no need to consider the role of the credit period when calculating its risk weight and economic capital, because the credit period has almost no effect on the credit granted to such companies with a high possibility of default. The role of adjusting risk weights.
It can be clearly seen from Table 4: For a company with a PD of 0.03%, the adjusting factor for 7-year credit is 2.3; for a company with a PD of 15%, The adjusting factor for the 7-year credit extension is 1.2. The regulating factors decreased with the increase of PD. Therefore, when banks expand long-term credit, they should not mistakenly believe that there is no risk in granting long-term credit to customers with excellent credit standing. The default risk (the first type of risk) of such customers is low, but the second type of risk is relatively high. Banks must be aware that The impact of the credit period on the non-default credit risk of such customers and its impact on the bank's economic capital.
We can confirm the inverse relationship between the New Capital Accord’s PD and the second type of risk through the data in the special report on defaults published by Standard & Poor’s in 2002 (that is, the lower the PD, the lower the The higher the risk at the non-default level). The following is an example of the rating change data for 1-year credit and 7-year credit in the Standard & Poor's report (see Tables 4 and 5).
As can be seen from Table 4 and Table 5, for AAA-rated companies, the probability of converting to a worse grade other than D-grade at the end of the seventh year (27.6%) is much higher than that of B-grade The probability of a company converting to CCC grade at the end of the seventh year (1.28%); its probability of converting to AA grade at the end of the first year (5.92%) is also higher than that of a B-class company converting to CCC grade at the end of the first year probability (3.90%), but the difference is not as obvious as the 7-year period. For B-rated companies, the probability of converting to a default rating at the end of the seventh year (24.24%) is much higher than the probability of converting to a CCC rating (1.28%). This confirms a rule that the second type of risk is inversely proportional to PD, and the longer the credit period, the more obvious the inverse relationship between PD and second type risk.
According to the press release of the Basel Committee on July 10, 2002, for banks that adopt the basic IRB method, the Basel Committee stipulates that local supervisory authorities may decide whether to also require these banks to measure the credit period. risk factors. For all banks that adopt the IRB approach (including basic IRB and advanced IRB), local regulatory agencies are allowed to decide whether to exempt all local banks that adopt the IRB approach. Credit extensions to small and medium-sized enterprise customers do not need to measure the loan term, but use the regulatory agency uniformly. The established 2.5-year term standard. Please note that the Basel Committee’s definition of SMEs mentioned here is different from the definition of SMEs mentioned in other sections. The definition here refers to a local enterprise whose comprehensive turnover and comprehensive assets in its consolidated statement do not exceed 500 million euros, equivalent to 3.9 billion Hong Kong dollars. If the local regulatory authorities decide to exempt all banks that adopt the IRB approach from measuring the credit term risk factors for the above-mentioned loans to small and medium-sized enterprises, then these credit terms will be treated as credits with an average term of 2.5 years. When the Basel Committee differentiates between banks' capital requirements for granting credit to large enterprises and small and medium-sized enterprises under the IRB method, the definition of small and medium-sized enterprises is that the annual turnover does not exceed 50 million euros, equivalent to 390 million Hong Kong dollars. When defining which small and medium-sized enterprises can be classified as retail credit, the overall credit limit granted by the bank to the enterprise does not exceed 1 million euros, which is equivalent to 7.8 million Hong Kong dollars. Different classification standards, when implementing the New Capital Accord, we must pay close attention to these areas that can easily cause confusion).