Retail vs. corporate credit default (time of default)

[emilioalzamora1]

Hi David,

I would like to ask the following: some reading in Part II (either Malz, Crouhy, Stulz Golin or Hull) mentions something about the time of default. Could be another author as well but I guess it must be somewhere in the aforementioned books.
It goes something like this: for corporates the probability of default is highest at the end of the loan whereas the probability of default for retail customers is highest at an early stage after the credit has been granted.

Do you perhaps remember which book discusses this in greater detail? I simply can't find it anymore. Neither in the original books nor in your chapter summaries.

Any input/reference is very much appreciated.

Many thanks!

 

[emilioalzamora1]

No clue at all here? I am sorry but I do need this information quite urgently.
Recent Part II candidates should remember this...

 

[David Harper CFA FRM]

Hi @emilioalzamora1 Crouhy has a long section on retail ("The nature of retail credit risk") but I don't think he speaks to default timing differences. This reminds me of the basel IRB risk weight function which gives special treatment to retail risk weight curves, but I don't think it is what you are looking for. It also reminds me of usage given default (UGD) but i don't think that's what you want either sorry ... I am looking ...

 

[emilioalzamora1]

Hi David, many thanks for getting back to me. I have already been through Crouhy once more but it is not there apparently.

I am still 100% sure that somewhere in the mandatory readings for Part II it elaborates on the difference in time of default between retail and corporates.
Most likely in Malz or in Stulz, I read through them as well but could not find it. It is somewhat strange because I really tried to remember this well before the exam back in November and now when I need the official reference (author) I can't find it anymore.

 

[David Harper CFA FRM]

Hi @emilioalzamora1 I looked through Malz but could not find this, sorry ...

 

[emilioalzamora1]

Ok, now it becomes worrisome. If the unimpeachable expert in the field! cannot find it/help out, then most probably I was dreaming about this

I will continue with my search and will be back in case I found something.

Many thanks for your the help, David

 

[David Harper CFA FRM]

omg please don't ever call me an "expert in the field" At best, I've read a narrow set of books over and over and over again and furiously referenced them over and over again in order to answer a few thousand questions. I think of myself as a concierge who gets to sit in the most exciting section of the library! Good luck with your search ... I slept on your question but nothing came up for me this morning, sorry

 

[brian.field]

Ok, now it becomes worrisome. If the unimpeachable expert in the field! cannot find it/help out, then most probably I was dreaming about this

I will continue with my search and will be back in case I found something.

Many thanks for your the help, David

If it helps, I remember reading something along these lines too!

 

[David Harper CFA FRM]

Um, that helps a little but doesn't get us any closer to finding it I will try again tonight (to find it) for a little bit since there seems to be a consensus that it exists ...

 

[brian.field]

I'll look when I have a few minutes too!

 

[berrymucho]

Hi David, many thanks for getting back to me. I have already been through Crouhy once more but it is not there apparently.

I am still 100% sure that somewhere in the mandatory readings for Part II it elaborates on the difference in time of default between retail and corporates.
Most likely in Malz or in Stulz, I read through them as well but could not find it. It is somewhat strange because I really tried to remember this well before the exam back in November and now when I need the official reference (author) I can't find it anymore.

Hello,

I retrieved 2 pointers:

[1] Crouhy, Chapter 9 of "The Essentials of Risk Management" (p.364 of GARP 2016 Credit Risk Measurement and Management book):

"A more benign feature of many retail portfolios is that a rise in defaults is often signaled in advance by a change in customer behavior..."
"By contrast, a commercial credit portfolio is something of a supertanker. By the time something is going wrong, it's often too late to do much about it."

The term "rise in defaults" would refer to probability of default and the phrasing would suggest different term structures between the two types of credit.

[2] Meissner, Chapter 1 of "Correlation Risk Modeling and Management" (p.142 of GARP 2016 Market Risk Measurement and Management book):

"For most investment grade bonds, the term structure of default probabilities increases in time..."
"For bonds in distress, however, the default term structure is typically inverse... This is because for a distressed company the immediate future is critical. If the company survives the coming problematic years, the probability of default decreases..."

Timing is at play here as well and clear reference to inverse term structures but the distinction is between corporate investment grade vs high yield.

Pointer #1 is probably your best bet... Hope this helps.

 

[emilioalzamora1]

@brian.field Hi Brian, many thanks! Hope all is well with you. Have not been in touch for a while.

@berrymucho excellent piece of work! Apparently this is the only information which is available. Honestly, I read through this as well but with less attention as I was sure there was something more (precise about retail vs. corporate; hard facts like some statistics). Anyway, many thanks for all your efforts! Really appreciate your help. Please do reach out to me if I can do something for you some time down the road.

All the best!

 

[David Harper CFA FRM]

Thank you @berrymucho those are good sources!