The Third International Conference on Credit Analysis and Risk Management was held at Oakland University on August 21-22, 2014 in Rochester, Michigan. The university's Enterprise Risk Analysis Institute in the Department of Accounting and Finance founded the conference series in 2011. As with the first and second such conferences, there were many very informative and thought-provoking presentations and speeches by both practitioners and academics. After having undergone a blind review and revisions (as well as being discussed at the conference), some of the excellent research from the event is published in this issue of The Journal of Credit Risk. (Less than a quarter of the submitted papers are included in this special issue.)
In the issue's first paper, "Sovereign risk and the pricing of corporate credit default swaps", Matthias Haerri, Stefan Morkoetter and SimoneWesterfeld empirically investigate the relationship between credit premiums on corporate debt and the extra return required for the credit risk of their home country governments. The authors find a significantly positive relationship between corporate credit default swap prices and the credit premium required on their host country's sovereign debt.
In our second paper, "Forecasting credit card portfolio losses in the Great Recession: a study in model risk", José J. Canals-Cerdá and SougataKerr empirically examine the factors affecting loss rates on credit cards. They find default losses to be significantly affected by interrelationships between borrower characteristics and macroeconomic variables, with the impact of the 2007-9 crisis being greater on prime debtors.
In the third paper in the issue, "How banks' capital ratio and size affect the stability of the banking system: a simulation-based study", Mitja Steinbacher and Matjaz Steinbacher use a network model to investigate how various shocks to a system of 150 interconnected banks affect their overall default rate given different levels of bank capital. The simulation provides some indication of the capital that may be required by banks to absorb various systematic losses on particular types of debts given that the default of any bank can contribute to the failure of other banks because of interbank debts and obligations.
In our fourth paper, "The relationship between counterparty default and interest rate volatility and its impact on the credit risk of interest rate derivatives", Geoffrey R. Harris, Tao L.Wu and JiaruiYang develop a mathematical model to investigate the extra losses incurred on the failure of a counterparty to an interest-rate swap given the typical two-week lag in unwinding the swaps of bankrupt institutions and given the greater likelihood of higher interest-rate volatility when there is a counterparty default. He finds that the higher interest-rate volatility existing at the time of greater counterparty defaults increases the losses upon the failure of a counterparty by about 10%, although the total mark-to-market margin required to protect a swap clearinghouse or counterparty from loss remains less than 1% of the notional.
How banks’ capital ratio and size affect the stability of the banking system: a simulation-based study
The relationship between counterparty default and interest rate volatility and its impact on the credit risk of interest rate derivatives