Coping with Credit Risk: Essays on defaulted bonds, asset based lending and provisioning for loan losses by …financial institutions

Uncertainty is part of life as the quote of Benjamin Franklin clearly states. A distinction should be made between uncertainty and risk. Uncertainty includes all facts in life that do not have a certain outcome and cannot be measured. Risk1 is the measurable counterpart of uncertainty (Knight (2002)). This thesis is focused on risk, and more speci…cally on credit risk. The risks companies face can be classi…ed broadly into two types of risks, business risks and …nancial risks. Business risks are the risks that are part of the core business of a company and which they use to create added value for stakeholders. Financial risks are the risks that are not based on the primary function of the company, but to which the company is exposed by the environment she has her activities in (Jorion (2007) and Duffie e & Singleton (2003)). A …nancial intermediary is an economic agent who specializes in the activities of buying and selling (at the same time) …nancial claims (Freixas & Rochet (2008)). Because the primary function of …nancial institutions is to manage …nancial risks actively, the distinction between business and …nancial risks is not apparent for …nancial institutions.

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