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Links  »  Credit Risk

Corporate Bond Credit risk 

Moodys offer a wide range of freely available research (see index) though registration is required. Of particular interest is the annual Corporate Default and Recovery Study which looks at corporate bond default experience since 1920. This may be biased towards US bonds as the US corporate bond market has historically been more developed than other markets but there is a separate report looking at European corporate bonds since 1985. There are also reports on the default and recovery experience of structured finance bonds such as ABSs and CDOs as well as sovereign bonds. Also of interest are the rating performance reports which look at how well ratings have performed in terms of predicting defaults.

"Modelling Extreme Credit Events" -  Staple Inn Actuarial Society paper, September 2011 focussing on corporate bonds.

"Credit risk modelling and liquidity premia assessment" - Staple Inn Actuarial Society (SIAS) paper, August 2009

"Corporate bonds - as good as they look?" - 2009 Actuarial profession presentation on Corporate Bonds, which, inter alia, covered likely default and recovery experience in the current crisis.

US Treasury Corporate Bond Yield Curve Papers and Data

ISDA Credit Derivative Determination Committee - this committee determines whether a "credit event" (i.e.default) has occurred on a bond that would trigger payout under a Credit Default Swap (CDS), and this site lists such events


Sovereign and Supra-national Credit Risk

As for corporate bonds, Moodys offer access to research on sovereign bond defaults and recoveries going back to 1983 along with studies of sub-national and municipal bond defaults.

An excellent historical overview of sovereign defaults is also provided in "This time is different: eight centuries of financial folly" by Carmen Reinhart and Kenneth Rogoff. While some of the research into the impact of government debt on growth has been called into question, it still offers valuable insights into the causes and consequences of financial and sovereign debt crises.


"Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten" - 2012 by Carmen Reinhart and Kenneth Rogoff

"From Financial Crash to Debt Crisis" - 2011 article by Carmen Reinhart and Kenneth Rogoff highlighting the links between surges in external borrowing, banking crises and sovereign debt crisis

"The Forgotten History of Domestic Debt" - this 2010 paper by Carmen Reinhart and Kenneth Rogoff looks at domestic debt i.e. debt issued under home jurisdiction, generally in a currency controlled by the issuing government; amongst other things it highlights instances of defaults in own currency government bonds

Data Sources

UK Debt Managment Office - with details of UK government debt in data on gilts in issue

Eurostat statistics – useful sources of data in assessing Eurozone and wider EU sovereign bond default risk

Government deficit and finances page

OECD statistics giving key national statistics: 

OECD Factbook 

Key supra-national issuers:

European Investment Bank (EIB) - with financial reports and debt rating details under the Investor Relations section; noting the substantial contingent support offered by EU states in the form of uncalled capital (see p4-5 of the 2012 Financial Report)

European Bank for Reconstruction and Development (EBRD) - including financial reports

Kreditanstalt fur Wiederaufbau (KfW) - issuer backed by the German government


Reinsurance Counterparty Risk

Note that aside from traditional reinsurance arrangement involving transfer of insurance risk, reinsurance counterparty risk can also arise on external fund links where the link is obtained through investing in another life insurer's fund rather than via OEICs - see COBS 21.3.3-4 of the FCA Handbook, noting that unless a legal charge is put in place, the life insurer reinsuring the funds will rank below other policyholders of the insurer accepting the funds, exacebating losses on default

"Will My Reinsurer Be There When I Need Them Most?" - presentation to the UK Actuarial Life Convention 2009


Derivative Counterparty Risk and Credit Derivatives

"Derivative risk management practices (DRMP) across the investment management industry"- final 2011 guidance issued by the FSA including management of counterparty risk (note the comments on p10 regarding exchange traded derivatives)

Counterparty Risk Management Policy Group – report on containing systemic risk, August 2008

"Credit derivatives" - Actuarial profession Derivatives Working Party 2006 report giving a useful overview of CDSs etc.

"The Story of the CDO Market Meltdown: An Empirical Analysis" (Anna Katherine Barnett-Hart, 2009) - excellent paper on the causes of the CDO losses during the financial crisis, and in particular the increasing exposure to sub-prime mortgages in the underlying portfolios


Deposit and Money Market Counterparty Risk

As for corporate bonds, Moodys offer access to research on commercial paper defaults going back to 1972

2011 EU-wide stress test results - results of European Banking Authority (EBA) stress tests which give some insight into the soundness of EU banks


Bank loan-related credit risk

BoE statistics on mortgage lending including default and arrears rates

FSA historical mortgage data

“Sound risk assessment and valuation of loans” – paper by the Bank of International Settlements (BIS), June 2006 


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