An Introduction to Stress Testing: Oil Prices, Default Probabilities and Credit Spreads

Over the last 18 months, the dramatic fall in oil prices has triggered a dramatic widening of credit spreads and default probabilities for oil-related firms. To a slightly lesser degree, the same kind of macro factor sensitivity in the credit spreads and default probabilities in firms closely associated with other basic commodities. This note explains the “reduced reduced form” modeling approach used in Kamakura’s KRIS default probability service to link forward looking macro factors to simulated default probabilities. We refer readers interested in more detail to the recent note from Kamakura “Bank of America and CCAR 2016 Stress Testing: A Simple Model Validation Example” and the references at the end of this note.


Junk Bondholders Step Up Measures to Boost Protections in Europe

High-yield bond buyers in Europe are considering new measures to protect their investments after previous efforts floundered.

They may issue an annual statement of principles for the junk bond market, said Martin Reeves, head of global high yield at Legal & General Investment Management, which manages about 757 billion pounds ($1.07 trillion). The statement would accompany anopen letter published last year by more than 20 asset managers including AllianceBernstein LP and Schroders Plc. Read more

Defaults Are on the Rise

The March rebalancing of the S&P U.S. Distressed High Yield Corporate Bond Index saw another increase in the number of qualifying constituents.  This marks the eighth increase of this kind in the last nine months.  The index, which is designed to measure securities with an option-adjusted spread greater than or equal to 1,000 bps, is down 35% over the past one-year period as of March 1, 2016.

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Global Growth Challenges: Horses For Courses

Global Growth Challenges: Horses For Courses

In the past eight years since the global economy suffered a financial heart attack that thrust it into a sharp, deep recession, economic policy has been in the spotlight and has been hotly debated, as governments and central banks have intervened in unprecedented ways and on an unprecedented scale to stabilize, stimulate, and refashion markets and economies. Gone, for now at least, are the days when macroeconomic policy was largely a fine-tuning exercise of central banks, and certainly gone are the days when markets could be assumed to be self-regulating. The recent slowdown in the global economy and recurrent bouts of market turbulence, giving rise to such policy actions as negative policy interest rates but also partly reacting to them, have caused renewed soul searching about appropriate policy choices. The growth and other challenges confronting the global economy demand policy action, but the policy debate is contested and contentious

Measuring Interest Rate Risk in the Life Insurance Sector: The U.S. and the U.K.


We use a two factor model of life insurer stock returns to measure interest rate risk at U.S. and U.K. insurers. Our estimates show that interest rate risk among U.S. life insurers increased as interest rates decreased to historically low levels in recent years. For life insurers in the U.K., in contrast, interest rate risk remained low during this time, roughly unchanged from what it was in the period prior to the financial crisis when long-term interest rates were in their usual historical ranges. We attribute these differences to the heavier use of products that combine guarantees with options for policyholders to adjust their behavior by U.S. life insurers relative to their U.K. counterparts.  Read more

Banks Once Burned, Now Twice Shy About Taking on More Takeover-Deal-Related Junk Debt

Even though the junk bond market has made an impressive rally since it got severely whacked in the commodities downdraft and the post-Fed rate-increase generalized selloff in January, the banks that are typically the first port of call for originating this type of debt are still suffering more than a bit of a hangover. Read more

U.S. Corporate Borrowers Face Borrowing Binge Downside As Average Credit Rating Slides

U.S. Corporate Borrowers Face Borrowing Binge Downside As Average Credit Rating Slides

U.S. nonfinancial corporate borrowers’ rating distribution and average credit rating have reached a near 15-year low–a sign that defaults could spike as the U.S. corporate credit cycle peaks. Our ‘BB’ average credit rating on U.S. corporate borrowers in 2015 has fallen below the average we recorded in the aftermath of the 2008-2009 credit crisis. After the financial crisis, quantitative easing-induced low interest rates enabled companies across the credit spectrum to borrow at attractive pricing and terms in the capital markets. And, until recently, investors were willing to accept the heightened risks associated with speculative-grade (rated ‘BB+’ and lower) debt in return for higher yields. However, the residual hangover from years of lenient credit may become painful for lower-quality issuers, especially when lenders become more selective and discerning. As borrowing costs rise with market volatility and uncertainty, lower-quality borrowers will most likely feel a credit pinch in a more subdued and conservative borrowing environment.

Top Free Financial Tools and Resources Every Finance Professional Must Know

Finance and investment jobs are perhaps some of the world’s most mind-crunching careers.

These professions carry with them a lot of complicated processes and activities. A lot of terms and formulas are so hard they can quickly be forgotten. One can easily get lost somewhere in the middle.

That’s why, over time, financial tools are being made to make things easier.They either aid in creating dynamic worksheets or maybe as simple as helping professionals in monitoring market developments.But, these financial tools are provided for a cost… but not always.

Read more

Japan’s Bond Market Is Close to Breaking Point

Signs of stress are multiplying in Japan’s government bond market, which is crumbling under pressure from the central bank’s unprecedented asset-purchase program and negative interest rates.

Bank of Japan Governor Haruhiko Kuroda has repeatedly said his policies are having the desired effect on markets, including suppressing JGB yields. His success is driving frenzied demand for longer-dated notes as investors avoid the negative yields offered on maturities up to 10 years. And as buyers hang on to debt offering interest returns, the BOJ is finding it harder to press on with bond purchases of as much as 12 trillion yen ($106 billion) a month, sparking sudden price swings leading to yield curve inversions that have nothing to do with economic fundamentals.  Read more

Meeting Asia’s Market and Counterparty Risk Challenge

Speakers at OTC Derivatives Summit 2016 tackle the complexities of global regulatory requirements.

International and regional banks conducting OTC derivatives business in Asia face new challenges in market risk measurement as well as additional capital commitments under global regulations such as FRTB (Fundamental Review of the Trading Book).

BCBS (the Basel Committee on Banking Supervision) issued a report late last year which said FRTB implementation could prompt an increase of 4.7 percent in banks’ capital requirements. Meanwhile, banks also face challenging requirements for measuring counterparty credit risk with the advent of stricter qualification requirements for the use of internal models and eventual move to SACCR (the Standardised Approach to Counterparty Credit Risk). Read more

Risk Off, Yields Move Lower

Global yields are lower year-to-date in all developed countries except Hong Kong, as measured by theS&P Global Developed Sovereign Bond Index.

Weak economic growth, low inflation, and concern over the situation in the Middle East have led many to invest in safer assets.

See more

Credit Spread and Low Volatility Factors

Credit Spread and Low Volatility Factors

Factor Definition The fixed income investment community has long used volatility in analyzing bond valuations and identifying investment opportunities.  We have defined volatility as the standard deviation of bond yield changes for the trailing six-month period.  All else being equal, the more volatile the bond yield is, the higher the yield needs to be in Read more […]

Why would a manufacturer finance a bank’s capital expenditure?

Usually a manufacturing company goes to a bank to finance its capital expenditure. But last month witnessed a deal where the US manufacturing giant GE stepped forward to finance the capital expenditure of one of the largest banks in the world – JPMorgan Chase – when the latter decided to buy 1.4 million LED bulbs to replace the lighting across 5,000 branches in the world’s largest single-order LED installation to date.

Read more

RBI’s Rajan: Central banks should be evaluated under global rules

RBI’s Rajan: Central banks should be evaluated under global rules

A global system should be created to assess the “spillover” effects of decisions made by central banks, including unconventional monetary policies, said Raghuram Rajan, governor of the Reserve Bank of India. “We can pretend all is well with the global financial non-system and hope that nothing goes spectacularly wrong. Or we can start building a system for the integrated world of the 21st century,” he said at an International Monetary Fund event in New Delhi. Reuters (12 Mar.)


BrightTalk Webinar : P2P Lending and its Limits, Risks? April 13, 430pm IST

Live online Apr 13 4:30 pm IST 

Register now 

With P2P lending being hailed as the future of lending, one has to ask, what are the risks involved, what are the challenges one might face in this realm, and ultimately, what are the limits of P2P lending?

Join this panel session where we will answer:

– Is the P2P Lending space not getting overcrowded ?

– What is the next phase in P2P lending ?

– The big awakening – once interest rates start to raise.

– Will Alternative lenders not eventually end up in the hand of the banks ?

– What are the regulatory threats ?

 Presented by
Pierre Suhrcke (Pascal Capital), Tom Meredith (SmartToken Chain), Florent Roulet (Nor Capital)

Basel’s Revision Of The Standardized Approach To Credit Risk: One Step Closer To Squaring The Circle?

Basel’s Revision Of The Standardized Approach To Credit Risk: One Step Closer To Squaring The Circle?

We believe the Basel Committee on Banking Supervision’s (BCBS) latest proposal to revise the standardized approach (SA) for assessing banks’ credit risk is an improvement on the initial version. In our opinion, these revisions, which the BCBS released for comments in December 2015, will better address the conundrum of risk-sensitivity and simplicity in standardized capital requirements. We also note some improvements in the granularity of capital requirements compared with the existing approach, although we believe it could still benefit from a few additional enhancements. The overall impact on banks’ creditworthiness will in our view be limited; but it will also depend on other consultations currently under way, such as the proposed introduction of standardized floors for banks using internal models. A very strict calibration of these floors could de-emphasize internal models in favor of standardized approaches

Renminbi Series Part 1: A Primer on China’s Currency

This is the first in a series on China’s currency, the renminbi.  Once posted, you will be able to find all the posts here.

China is in the middle of a push to “internationalize” the renminbi, signified by a successful push to add the currency to the special drawing rights (SDR) basket of the International Monetary Fund (IMF).  The international use of China’s currency is rising, although it is still just the fifth most used currency worldwide and represents only around 2.5 percent of global payments, according to the Society for Worldwide Interbank Financial Telecommunication (SWIFT).  China’s currency has been all over the news lately for other reasons, from charges of currency manipulation by US presidential candidates toconcerns China will significantly devalue its currency in an attempt to boost exports.  This series of blog posts begins by examining the overall picture of China’s currency, the renminbi (RMB), followed by posts focusing on whether it is overvalued, where China’s exchange rate policy may go, and offshore trading of the renminbi (CNH). Read more

Contingent Liabilities Risk Management: A Credit Risk Analysis Framework for Sovereign Guarantees and On-Lending

Sovereign credit guarantees and government on-lending can catalyze private sector investment and fulfill specific policy objectives. However, contingent liabilities stemming from guarantees and contingent assets stemming from on-lending expose governments to risk. Prudent risk management, including risk analysis and measurement, can help identify and mitigate these risks

Read full paper