Financial Institutions

This paper develops numerical approximations for pricing collateralized debt obligations (CDOs) and other portfolio credit derivatives in the multifactor Normal Copula model. A key aspect of pricing portfolio credit derivatives is capturing dependence between the defaults of the elements of the portfolio. But, compared with an independent-obligor model, pricing in a model with correlated defaults is more challenging. Our approach strikes a balance by reducing the problem of pricing in a model with correlated defaults to calculations involving only independent defaults.

Standard valuation methods do not lend themselves to bank holding companies. Banks create value through the types of assets and liabilities they create (e.g., lending and deposit taking relationships). Bank income streams reflect heterogeneous sources of income which differ in their margins of profitability and persistence.

Ernst & Young hosted this 2007 roundtable with the goal of providing a better understanding of the challenges and best practices of using valuation analysis to support executive decisions. Panelists included Richard Ruback of the Harvard Business School, Trevor Harris of Morgan Stanley, Aileen Stockburger of Johnson & Johnson, Dino Mauricio of General Electric, Christian Roch of BNP Paribas, Ken Meyers of Siemens Corporation, and Charles Kantor of Lehman Brothers. Jeff Green of Ernst & Young moderated.

This paper studies the application of fair value accounting in bank holding companies in the United States with the purpose of evaluating the effects of expanding fair value accounting in the banking industry.

Recent deliberations by both the International Accounting Standards Board (IASB) and the Financial Accounting Standard Board (FASB) in the United States have focused on how fair values of assets and liabilities should be measured. The issue of when, rather than how, fair value measurement should be applied is still far from resolved, however.

This chapter provides an overview of modeling and computational issues associated with portfolio credit risk. We consider the problem of calculating the loss distribution in a portfolio of assets exposed to credit risk, such as corporate bonds or bank loans. We also discuss the pricing of portfolio credit derivatives, such as basket default swaps and collateralized debt obligations. A portfolio view of credit risk requires capturing dependence between the assets in the portfolio; we discuss models of dependence and associated computational techniques.