This second edition publishes ten years after the first. Much has changed in credit risk, but the book suffers unfortunate timing: while some chapters reference the 2007+ credit crunch, none of the employed databases do (e.g., defaults, rating migrations). That's not the fault of the authors, the data just hadn't been recorded. For example, rating and default performance discussions are based on good historical records, but alas the relevant databases they don't reflect very recent activity.
This is a satisfactory survey of credit risk. But it is primarily a qualitative survey. If you are looking for a book on credit risk models, this isn't your answer. It only flirts in sections with quantitative methods. It does have an introduction to credit portfolio models, but it does not really penetrate their mechanics. I was hoping to learn something new about portfolio methods (CreditMetrics, CreditRisk+, KMV PM) but I didn't find much new here (the credit portfolio surveys barely improve on the De Servigny who has been assigned in the FRM). As Edward Altman is an author, there is quite a bit of historical data on ratings and migration patterns.
The first half of the book, frankly, is a bland introduction/rehash that brings little new information or insight. The second half is better.
Some of my highlights/notes:
Introduction to credit industry players (Chapters 1 through 5)
Pretty typical overview of rating agencies. Unfortunately, the database predates the credit crunch (Chapter 6)
Classic credit analysis. Ratios like ROE and EBITDA and their flaws; e.g., they ignore, respectively, risk and capital employed. (Chapter 7)
Chapter 8 is brief, weak filler on asset based lending.
Chapter 9 a brief throwaway introduction to credit risk models. Introduces typology (econometrics, simulation, optimization) then ignores it.
Chapter 10 is about models based on accounting data. As you'd expect, a helpful review of Altman's Z and its variations (private firm Z')
Chapter 11 introduction the structural model using Moody's KMV EDF. Nothing new, KMV's own papers are better.
Chapter 12 and 13: Consumer finance and small business credit models. Introductions.
Chapter 14: Testing and implementation of credit risk models. Brief mention of Type I error (model classifies bankrupt company as nonbankrupt) and Type II error (model classifies nonbankrupt company as bankrupt). Brief extract of Basel II. Disappointing, no depth. This wasn't such a hot topic at press, but it will be!
Chapter 15 (About Corporate Default rates) starts the better part of the book.
Chapter 16 is an easy, helpful introduction to structural versus reduced-form (again, if you are looking for quant, it will be too easy). And credit value-at-risk (credit VaR; i.e., a loss quantile based on a distributional assumption). Helpful discussion of recovery rates and procylicality; e.g., if you assume PD and recovery are uncorrelated (data doesn't support this, data shows correlation), then you expected loss (EL) and unexpected loss (UL) are underestimated.
Chapter 17 (credit risk migration) helpfully contrasts three migration studies, including Altman's. Highlights aging effect: older bonds have greater tendency to be upgraded/downgraded than newly issued bonds.
Chapter 18 very *lightly* introduces portfolio approaches; e.g., diversity score used in Moody's binomial expansion technique (BET).
Chapter 19 on economic capital is a good intro that compares RAROC to other metrics and nicely distinguishes between economic and regulatory capital.
Application of portfolio approaches (20) repeats what is elsewhere found on, e.g., creditmetrics. BIS II IRB glancingly discussed; much better are BIS own documents!
Chapters 20-24 introduce topics (credit derivatives, counterparty risk, country risk models, and structured finance) but covers none of them deeply.
The last two chapters (25 and 26) talk about new players (SIV, CDPC) and make predictions. They are okay summaries, no new insights whatsover.; e.g., liquidity risk is "the next big challenges,"