Handbook of Credit Risk Management, Ch 13: Credit Portfolio Management

Question 1

Compare CPA vs CPM

Answer 1

Credit portfolio assessment (CPA) focuses on individual transactions

Credit portfolio management (CPM) should take a big picture view and manage
the risk of the portfolio in its entirety

Question 2

State the three different levels of CPM.

Answer 2

Level 1: Basic CPM

Level 2: Intermediate CPM

Level 3: Active CPM

Question 3

State the five actions for level 1 CPM.

Answer 3

1. Aggregation
2. Reporting
3. Credit Limits
4. Surveillance
5. Mitigation

Question 4

Define the following terms from level 1 CPM: aggregation, credit limits, and
surveillance.

Answer 4

Aggregation - measuring the accumulation of risk for each counterparty

Credit limit - the absolute amount of exposure a firm wants to take

Surveillance - monitoring of the performance of the transaction and counterparty
after the deal has been closed

Question 5

State the five additional actions required for level 2 CPM

Answer 5

1. Quantification of the Capital at Risk
2. Allocation of Capital and Profitability at Individual Transaction Level
3. Stress Testing
4. Hedging Strategy
5. Rebalancing Transactions

Question 6

Define velocity of capital.

Answer 6

Velocity of capital - speed at which capital is redeployed to new transactions

Question 7

State the two additional actions required for level 3 CPM.

Answer 7

1. Transfer Pricing
2. Acquisitions/Swaps of Exposures

Question 8

State the two main reasons firms may want to mitigate credit risk of an existing
transaction.

Answer 8

Two main reasons for this include:
1. Decline of the creditworthiness of the counterparty
2. Firm accepts a transaction that bears credit exposure beyond its appetite for the
counterparty