Freeing capital: swaps versus CLOs
The collapse of Japan’s tenth largest bank is a timely reminder that credit risk is the largest and most pervasive of all those which financial institutions face but the least rationally priced and least scientifically managed. New approaches to credit-risk modelling, applying modern mathematical, computational and database techniques, could revolutionize the way banks allocate economic capital and make provisions and could also create a new discipline of credit portfolio management.
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