Evolution of Portfolio Management Business Models

Credit portfolio management consists of a variety of activities, many of which, like portfolio risk modelling, measuring, reporting, and monitoring, are rather passive. The business models of credit portfolio management can be described according to the activities performed and the level of sophistication and autonomy. The role of a ‘ risk controller ’ is to provide intelligence on key risk measures and developments as well as on the usage of limits. Setting portfolio risk limits and developing risk strategies for performing loans are the responsibilities of the ‘ risk protector ’. The focus here is on risk reduction or risk containment rather than risk/return optimization. The ‘ risk optimizer ’ defines a target portfolio and optimizes growth based on risk-adjusted returns. Stress tests are performed to confirm the feasibility of various strategies and to discover any hidden vulnerabilities in the portfolio and the strategy. Until this point, all portfolio management measures target the new flow of business, which includes asset origination as well as refinancing of existing stock due to repayments, amortizations and prepayments. In contrast, the ‘ value creator ’, or Active Credit Portfolio Management ( ACPM ), can be defined as actively reshaping and changing the risk/return profile of a given portfolio of credit risk to improve key portfolio measures, such as value at risk (VaR) and conditional value at risk (CVaR), to a level consistent with the loss tolerance of the respective financial institution. These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.