Credit Risk Management in the Automotive Industry

1 Introduction.- 2 The Automotive Industry.- 2.1 Relevance of the Industry and of the Captive Financial Companies.- 2.2 Risk Management in Industry and Commerce.- 2.2.1 Risks and Risk Management in Banking.- 2.2.2 Risks in Industry and Commerce.- 2.2.3 Risk Management in Industry and Commerce.- 2.2.4 Risks and Risk Management in the Automotive Industry.- 2.3 Stakeholders in the Automotive Industry.- 2.3.1 Classical Stakeholders and Captive Finance Companies.- 2.3.2 The Regulator as Additional Stakeholder.- 2.3.3 Conflict of Interest.- 2.4 Summary.- 3 Credit Risk Models.- 3.1 Model Requirements in the Automotive Industry.- 3.1.1 Types of Products in Car Financing and Leasing.- 3.1.2 Credit Portfolios in the Automotive Industry.- 3.1.3 Data Availability, Empirical and Modeling Requirements.- 3.2 Elements of Credit Risk Modeling.- 3.2.1 Conceptional Issues.- 3.2.2 Parameter Specification.- 3.2.3 Backtesting and Alternatives for Validation.- 3.2.4 Implications for the Automotive Industry.- 3.3 Model Selection.- 3.3.1 Short History of Credit Risk Models.- 3.3.2 Classification of Credit Risk Models.- 3.3.3 Comparability and Mixtures of Models.- 3.3.4 Applicability of Model Types to Auto Portfolios.- 3.3.5 Implementations of CR+.- 4 CreditRisk+ and the Regulatory Model.- 4.1 The Original CreditRisk+ Model.- 4.1.1 Introduction and Survey.- 4.1.2 Data Requirements.- 4.2 Framework of CreditRisk+.- 4.2.1 Probability Generating Functions.- 4.2.2 Assumption I: Default independence conditional on individual default rates.- 4.2.3 Assumption II: Approximation of probability generating function.- 4.2.4 Assumption III: Functional form of the individual default rates.- 4.2.5 Idiosyncratic Sectors.- 4.2.6 Assumption IV: Independent gamma distributions of sector default rates.- 4.2.7 Assumption V: Rounding and standardizing of exposures.- 4.2.8 Computation of the Unconditional Loss Distribution.- 4.2.9 Implied Dependency Structure.- 4.2.10 Discussion.- 4.3 Extensions of CreditRisk+.- 4.3.1 Incorporation of Rating Migrations.- 4.3.2 Default and Loss Correlations.- 4.4 Implementation of CreditRisk+.- 4.4.1 Determination of Loss Distribution.- 4.4.2 Further Issues.- 4.5 The Regulatory Model.- 5 Credit Risk Management.- 5.1 Risk Measures and Contributions.- 5.1.1 Portfolio Risk Measures.- 5.1.2 Examples for Portfolio Risk Measures.- 5.1.3 Risk Contributions.- 5.2 Portfolio Risk Measures and Contributions in CreditRisk+.- 5.2.1 Portfolio Risk Measures.- 5.2.2 Risk Contributions.- 6 A Model for Securitization.- 6.1 Capital and the Management of Financial Institutions.- 6.1.1 Capital.- 6.1.2 Views on Capital at Financial Institutions.- 6.2 Securitization.- 6.2.1 Introduction.- 6.2.2 Proceedings, Classifications, and Structures of Securitization.- 6.2.3 Motivation for Securitizations.- 6.2.4 Excursion: Moody’s Approach to Asset-backed Securities.- 6.3 Securitization in the Automotive Industry.- 6.3.1 Issuer’s View.- 6.3.2 Investors’s View.- 6.3.3 Securitization Example: DC Auto Trust 2002-C.- 6.3.4 Employment of Credit Derivatives.- 6.4 A Model for the Securitization of Car Financing Contracts.- 6.4.1 General Setting.- 6.4.2 Short Survey of Objectives.- 6.4.3 Objective 1: Minimizing Regulatory Capital.- 6.4.4 Objective 2: Regulatory Capital Arbitrage.- 6.4.5 Objective 3: Optimization of RoE and RoRaC.- 6.4.6 Alternative Problem Formulations.- 6.4.7 Extensions of the Model.- 6.5 Regulatory Framework.- 6.5.1 Alignment of the Model in the Regulatory Framework.- 6.5.2 Inputs for the Calculation of Regulatory Capital for Securitized Loans.- 6.5.3 The Supervisory Formula Approach SFA.- 7 Empirical Analysis.- 7.1 Implementation.- 7.1.1 Model Choice, Parameterization and Implementation.- 7.1.2 Implementation of Framework and Problems.- 7.1.3 Simulation of Loss Distribution.- 7.2 Data Information and Manipulations.- 7.2.1 Loss Rate Information.- 7.2.2 Default Rate Information.- 7.2.3 Borrower Information.- 7.3 Results.- 7.3.1 Loss Distribution and Risk Contributions.- 7.3.2 Optimization Results.- 7.4 Conclusion.- 8 Summary and Topics for Future Research.- Appendix: Explicit Calculations for the CR+ Model.- Appendix: Abbreviations.- Appendix: Variables.