Roles and responsibilities Essay Example | Topics and Well Written Essays - 2000 words

Roles and responsibilities - Essay Example Coaching and physical instruction involves programming and planning process. It extensively involves the teaching style, the learning style, the leadership style, the coaching style and the communication skills. According to Cross (1999), physical fitness is categorized into two, first, is the general fitness which refers to the condition of an individual health and wealth being. Secondly, is the specific fitness which is mainly task-oriented. It is defined depending on an individual’s ability to carry out different aspects of sports. Physical fitness is gained through exercising, having the correct nutrition and adequate rest. All these are important in an individual’s life. According to Weinberg and Gould (2005), physical activity is an exercise through which the body is made to work extra hard than normal. It involves actives that go to the extreme level as compared to one’s routine of just sitting, standing and walking up the stairs. Increased Physical activi ty is beneficial to all. Sport is known to be a game that has its basis in physical athleticism, (Heyward, 2006). The roles and responsibilities of a coach are viewed at times as being complex and involving Cassidy, (2005). At the same time they are exciting and very rewarding to all individuals involved. ... This is based on the idea that reassurance and relieve is attained through sharing anxieties. Fourthly, a coach is a demonstrator; a coach has to clearly demonstrate the right skill which the athletes are supposed to perform. Fifth, he or she plays a role of a friend; a coach and an athlete develop personal relationship with time as they work together. Apart from provision of coaching advice sport coach become a close person who can also be involved problems discussion and sharing of success. A coach has to be careful and ensure that all personal information remains confidential. Through this, the coach will manage to maintain the existing friendship and respect. The sixth role is that of a facilitator, a coach is greatly involved in identifying the appropriate competitions which best suit the athletes. This will assist the competitors in attaining their yearly objectives. The seventh role is that of a fact finder, a coach plays a key role in collection of data of both national and i nternational results and provides updates with the latest training techniques. Eight, a coach is a fountain of knowledge; in some cases coaches are asked questions on different events on media, for example television, diet, sport injuries and other topics outside the field of sports. Ninth, a coach is also an instructor who is supposed to instruct athletes on different sport skills. Tenth, he or she is a motivator; a coach plays a key role in maintaining the motivation of athletes throughout the year. Twelfth, he or she is a role model, a coach remains to be a model on specific behavioural and social role for those under him or her to imitate. This is among the most important roles as coaches are required to be good examples to

Film responses 13 Movie Review Example | Topics and Well Written Essays - 500 words

Film responses 13 - Movie Review Example The jump cut shows Antoine in the bathroom. He wipes the mirror and there is a voice-over of the teacher saying: â€Å"I deface the classroom walls.† The voice-over is a distancing technique. It helps people to think about the kind of boy that Antoine is and the kind of life that he has than feel for him as a delinquent. When his father appears in the mirror to show his socks with many holes, it shows the theme of mixing genres, of including comedy in a dramatic moment. This is part of the auteur theory where Truffaut includes small things that matter to a leisure narrative development, especially the wit and charm of the characters. Try to make a point of not choosing opening scenes or scenes that are featured on You Tube.When you find a scene that clearly shows French New Wave technical & thematic elements--note those elements as you  describe each scene in vivid detail--using film terms whenever appropriate.  Remember--its always easiest to work your way chronologically through the scene--describing what you see as the narrative unfolds.   Important--Make sure you also extend your description into a discussion of the purpose and/or effect of various technical or elements of mise-en-scene choices. The assignment this week will help prepare you for next weeks

Credit Risk Dissertation

Credit Risk Dissertation CREDIT RISK EXECUTIVE SUMMARY The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The major cause of serious banking problems over the years continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to deterioration in the credit standing of a banks counterparties. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. There have been many traditional approaches to measure credit risk like logit, linear probability model but with passage of time new approaches have been developed like the Credit+, KMV Model. Basel I Accord was introduced in 1988 to have a framework for regulatory capital for banks but the â€Å"one size fit all† approach led to a shift, to a new and comprehensive approach -Basel II which adopts a three pillar approach to risk management. Banks use a number of techniques to mitigate the credit risks to which they are exposed. RBI has prescribed adoption of comprehensive approach for the purpose of CRM which allows fuller offset of security of collateral against exposures by effectively reducing the exposure amount by the value ascribed to the collateral. In this study, a leading nationalized bank is taken to study the steps taken by the bank to implement the Basel- II Accord and the entire framework developed for credit risk management. The bank under the study uses the credit scoring method to evaluate the credit risk involved in various loans/advances. The bank has set up special software to evaluate each case under various parameters and a monitoring system to continuously track each assets performance in accordance with the evaluation parameters. CHAPTER 1 INTRODUCTION 1.1 Rationale Credit Risk Management in todays deregulated market is a big challenge. Increased market volatility has brought with it the need for smart analysis and specialized applications in managing credit risk. A well defined policy framework is needed to help the operating staff identify the risk-event, assign a probability to each, quantify the likely loss, assess the acceptability of the exposure, price the risk and monitor them right to the point where they are paid off. Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures. It is, therefore, time that banks managements equip them fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. According to an estimate, Credit Risk takes about 70% and 30% remaining is shared between the other two primary risks, namely Market risk (change in the market price and operational risk i.e., failure of internal controls, etc.). Quality borrowers (Tier-I borrowers) were able to access the capital market directly without going through the debt route. Hence, the credit route is now more open to lesser mortals (Tier-II borrowers). With margin levels going down, banks are unable to absorb the level of loan losses. Even in banks which regularly fine-tune credit policies and streamline credit processes, it is a real challenge for credit risk managers to correctly identify pockets of risk concentration, quantify extent of risk carried, identify opportunities for diversification and balance the risk-return trade-off in their credit portfolio. The management of banks should strive to embrace the notion of ‘uncertainty and risk in their balance sheet and instill the need for approaching credit administration from a ‘risk-perspective across the system by placing well drafted strategies in the hands of the operating staff with due material support for its successful implementation. There is a need for Strategic approach to Credit Risk Management (CRM) in Indian Commercial Banks, particularly in view of; (1) Higher NPAs level in comparison with global benchmark (2) RBI s stipulation about dividend distribution by the banks (3) Revised NPAs level and CAR norms (4) New Basel Capital Accord (Basel -II) revolution 1.2 OBJECTIVES To understand the conceptual framework for credit risk. To understand credit risk under the Basel II Accord. To analyze the credit risk management practices in a Leading Nationalised Bank 1.3 RESEARCH METHODOLOGY Research Design: In order to have more comprehensive definition of the problem and to become familiar with the problems, an extensive literature survey was done to collect secondary data for the location of the various variables, probably contemporary issues and the clarity of concepts. Data Collection Techniques: The data collection technique used is interviewing. Data has been collected from both primary and secondary sources. Primary Data: is collected by making personal visits to the bank. Secondary Data: The details have been collected from research papers, working papers, white papers published by various agencies like ICRA, FICCI, IBA etc; articles from the internet and various journals. 1.4 LITERATURE REVIEW * Merton (1974) has applied options pricing model as a technology to evaluate the credit risk of enterprise, it has been drawn a lot of attention from western academic and business circles.Mertons Model is the theoretical foundation of structural models. Mertons model is not only based on a strict and comprehensive theory but also used market information stock price as an important variance toevaluate the credit risk.This makes credit risk to be a real-time monitored at a much higher frequency.This advantage has made it widely applied by the academic and business circle for a long time. Other Structural Models try to refine the original Merton Framework by removing one or more of unrealistic assumptions. * Black and Cox (1976) postulate that defaults occur as soon as firms asset value falls below a certain threshold. In contrast to the Merton approach, default can occur at any time. The paper by Black and Cox (1976) is the first of the so-called First Passage Models (FPM). First passage models specify default as the first time the firms asset value hits a lower barrier, allowing default to take place at any time. When the default barrier is exogenously fixed, as in Black and Cox (1976) and Longstaff and Schwartz (1995), it acts as a safety covenant to protect bondholders. Black and Cox introduce the possibility of more complex capital structures, with subordinated debt. * Geske (1977) introduces interest-paying debt to the Merton model. * Vasicek (1984) introduces the distinction between short and long term liabilities which now represents a distinctive feature of the KMV model. Under these models, all the relevant credit risk elements, including default and recovery at default, are a function of the structural characteristics of the firm: asset levels, asset volatility (business risk) and leverage (financial risk). * Kim, Ramaswamy and Sundaresan (1993) have suggested an alternative approach which still adopts the original Merton framework as far as the default process is concerned but, at the same time, removes one of the unrealistic assumptions of the Merton model; namely, that default can occur only at maturity of the debt when the firms assets are no longer sufficient to cover debt obligations. Instead, it is assumed that default may occur anytime between the issuance and maturity of the debt and that default is triggered when the value of the firms assets reaches a lower threshold level. In this model, the RR in the event of default is exogenous and independent from the firms asset value. It is generally defined as a fixed ratio of the outstanding debt value and is therefore independent from the PD. The attempt to overcome the shortcomings of structural-form models gave rise to reduced-form models. Unlike structural-form models, reduced-form models do not condition default on the value of the firm, and parameters related to the firms value need not be estimated to implement them. * Jarrow and Turnbull (1995) assumed that, at default, a bond would have a market value equal to an exogenously specified fraction of an otherwise equivalent default-free bond. * Duffie and Singleton (1999) followed with a model that, when market value at default (i.e. RR) is exogenously specified, allows for closed-form solutions for the term-structure of credit spreads. * Zhou (2001) attempt to combine the advantages of structural-form models a clear economic mechanism behind the default process, and the ones of reduced- form models unpredictability of default. This model links RRs to the firm value at default so that the variation in RRs is endogenously generated and the correlation between RRs and credit ratings reported first in Altman (1989) and Gupton, Gates and Carty (2000) is justified. Lately portfolio view on credit losses has emerged by recognising that changes in credit quality tend to comove over the business cycle and that one can diversify part of the credit risk by a clever composition of the loan portfolio across regions, industries and countries. Thus in order to assess the credit risk of a loan portfolio, a bank must not only investigate the creditworthiness of its customers, but also identify the concentration risks and possible comovements of risk factors in the portfolio. * CreditMetrics by Gupton et al (1997) was publicized in 1997 by JP Morgan. Its methodology is based on probability of moving from one credit quality to another within a given time horizon (credit migration analysis). The estimation of the portfolio Value-at-Risk due to Credit (Credit-VaR) through CreditMetrics A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. * (Sy, 2007), states that the primary cause of credit default is loan delinquency due to insufficient liquidity or cash flow to service debt obligations. In the case of unsecured loans, we assume delinquency is a necessary and sufficient condition. In the case of collateralized loans, delinquency is a necessary, but not sufficient condition, because the borrower may be able to refinance the loan from positive equity or net assets to prevent default. In general, for secured loans, both delinquency and insolvency are assumed necessary and sufficient for credit default. CHAPTER 2 THEORECTICAL FRAMEWORK 2.1 CREDIT RISK: Credit risk is risk due to uncertainty in a counterpartys (also called an obligors or credits) ability to meet its obligations. Because there are many types of counterparties—from individuals to sovereign governments—and many different types of obligations—from auto loans to derivatives transactions—credit risk takes many forms. Institutions manage it in different ways. Although credit losses naturally fluctuate over time and with economic conditions, there is (ceteris paribus) a statistically measured, long-run average loss level. The losses can be divided into two categories i.e. expected losses (EL) and unexpected losses (UL). EL is based on three parameters:  ·Ã¢â€š ¬Ã‚   The likelihood that default will take place over a specified time horizon (probability of default or PD)  · â‚ ¬Ã‚  The amount owned by the counterparty at the moment of default (exposure at default or EAD)  ·Ã¢â€š ¬Ã‚   The fraction of the exposure, net of any recoveries, which will be lost following a default event (loss given default or LGD). EL = PD x EAD x LGD EL can be aggregated at various different levels (e.g. individual loan or entire credit portfolio), although it is typically calculated at the transaction level; it is normally mentioned either as an absolute amount or as a percentage of transaction size. It is also both customer- and facility-specific, since two different loans to the same customer can have a very different EL due to differences in EAD and/or LGD. It is important to note that EL (or, for that matter, credit quality) does not by itself constitute risk; if losses always equaled their expected levels, then there would be no uncertainty. Instead, EL should be viewed as an anticipated â€Å"cost of doing business† and should therefore be incorporated in loan pricing and ex ante provisioning. Credit risk, in fact, arises from variations in the actual loss levels, which give rise to the so-called unexpected loss (UL). Statistically speaking, UL is simply the standard deviation of EL. UL= ÏÆ' (EL) = ÏÆ' (PD*EAD*LGD) Once the bank- level credit loss distribution is constructed, credit economic capital is simply determined by the banks tolerance for credit risk, i.e. the bank needs to decide how much capital it wants to hold in order to avoid insolvency because of unexpected credit losses over the next year. A safer bank must have sufficient capital to withstand losses that are larger and rarer, i.e. they extend further out in the loss distribution tail. In practice, therefore, the choice of confidence interval in the loss distribution corresponds to the banks target credit rating (and related default probability) for its own debt. As Figure below shows, economic capital is the difference between EL and the selected confidence interval at the tail of the loss distribution; it is equal to a multiple K (often referred to as the capital multiplier) of the standard deviation of EL (i.e. UL). The shape of the loss distribution can vary considerably depending on product type and borrower credit quality. For example, high quality (low PD) borrowers tend to have proportionally less EL per unit of capital charged, meaning that K is higher and the shape of their loss distribution is more skewed (and vice versa). Credit risk may be in the following forms: * In case of the direct lending * In case of the guarantees and the letter of the credit * In case of the treasury operations * In case of the securities trading businesses * In case of the cross border exposure 2.2 The need for Credit Risk Rating: The need for Credit Risk Rating has arisen due to the following: 1. With dismantling of State control, deregulation, globalisation and allowing things to shape on the basis of market conditions, Indian Industry and Indian Banking face new risks and challenges. Competition results in the survival of the fittest. It is therefore necessary to identify these risks, measure them, monitor and control them. 2. It provides a basis for Credit Risk Pricing i.e. fixation of rate of interest on lending to different borrowers based on their credit risk rating thereby balancing Risk Reward for the Bank. 3. The Basel Accord and consequent Reserve Bank of India guidelines requires that the level of capital required to be maintained by the Bank will be in proportion to the risk of the loan in Banks Books for measurement of which proper Credit Risk Rating system is necessary. 4. The credit risk rating can be a Risk Management tool for prospecting fresh borrowers in addition to monitoring the weaker parameters and taking remedial action. The types of Risks Captured in the Banks Credit Risk Rating Model The Credit Risk Rating Model provides a framework to evaluate the risk emanating from following main risk categorizes/risk areas: * Industry risk * Business risk * Financial risk * Management risk * Facility risk * Project risk 2.3 WHY CREDIT RISK MEASUREMENT? In recent years, a revolution is brewing in risk as it is both managed and measured. There are seven reasons as to why certain surge in interest: 1. Structural increase in bankruptcies: Although the most recent recession hit at different time in different countries, most statistics show a significant increase in bankruptcies, compared to prior recession. To the extent that there has been a permanent or structural increase in bankruptcies worldwide- due to increase in the global competition- accurate credit analysis become even more important today than in past. 2. Disintermediation: As capital markets have expanded and become accessible to small and mid sized firms, the firms or borrowers â€Å"left behind† to raise funds from banks and other traditional financial institutions (FIs) are likely to be smaller and to have weaker credit ratings. Capital market growth has produced â€Å"a winners† curse effect on the portfolios of traditional FIs. 3. More Competitive Margins: Almost paradoxically, despite the decline in the average quality of loans, interest margins or spreads, especially in wholesale loan markets have become very thin. In short, the risk-return trade off from lending has gotten worse. A number of reasons can be cited, but an important factor has been the enhanced competition for low quality borrowers especially from finance companies, much of whose lending activity has been concentrated at the higher risk/lower quality end of the market. 4. Declining and Volatile Values of Collateral: Concurrent with the recent Asian and Russian debt crisis in well developed countries such as Switzerland and Japan have shown that property and real assets value are very hard to predict, and to realize through liquidation. The weaker (and more uncertain) collateral values are, the riskier the lending is likely to be. Indeed the current concerns about deflation worldwide have been accentuated the concerns about the value of real assets such as property and other physical assets. 5. The Growth Of Off- Balance Sheet Derivatives: In many of the very large U.S. banks, the notional value of the off-balance-sheet exposure to instruments such as over-the-counter (OTC) swaps and forwards is more than 10 times the size of their loan books. Indeed the growth in credit risk off the balance sheet was one of the main reasons for the introduction, by the Bank for International Settlements (BIS), of risk based capital requirements in 1993. Under the BIS system, the banks have to hold a capital requirement based on the mark- to- market current values of each OTC Derivative contract plus an add on for potential future exposure. 6. Technology Advances in computer systems and related advances in information technology have given banks and FIs the opportunity to test high powered modeling techniques. A survey conducted by International Swaps and Derivatives Association and the Institute of International Finance in 2000 found that survey participants (consisting of 25 commercial banks from 10 countries, with varying size and specialties) used commercial and internal databases to assess the credit risk on rated and unrated commercial, retail and mortgage loans. 7. The BIS Risk-Based Capital Requirements Despite the importance of above six reasons, probably the greatest incentive for banks to develop new credit risk models has been dissatisfaction with the BIS and central banks post-1992 imposition of capital requirements on loans. The current BIS approach has been described as a ‘one size fits all policy, irrespective of the size of loan, its maturity, and most importantly, the credit quality of the borrowing party. Much of the current interest in fine tuning credit risk measurement models has been fueled by the proposed BIS New Capital Accord (or so Called BIS II) which would more closely link capital charges to the credit risk exposure to retail, commercial, sovereign and interbank credits. Chapter- 3 Credit Risk Approaches and Pricing 3.1 CREDIT RISK MEASUREMENT APPROACHES: 1. CREDIT SCORING MODELS Credit Scoring Models use data on observed borrower characteristics to calculate the probability of default or to sort borrowers into different default risk classes. By selecting and combining different economic and financial borrower characteristics, a bank manager may be able to numerically establish which factors are important in explaining default risk, evaluate the relative degree or importance of these factors, improve the pricing of default risk, be better able to screen out bad loan applicants and be in a better position to calculate any reserve needed to meet expected future loan losses. To employ credit scoring model in this manner, the manager must identify objective economic and financial measures of risk for any particular class of borrower. For consumer debt, the objective characteristics in a credit -scoring model might include income, assets, age occupation and location. For corporate debt, financial ratios such as debt-equity ratio are usually key factors. After data are identified, a statistical technique quantifies or scores the default risk probability or default risk classification. Credit scoring models include three broad types: (1) linear probability models, (2) logit model and (3) linear discriminant model. LINEAR PROBABILITY MODEL: The linear probability model uses past data, such as accounting ratios, as inputs into a model to explain repayment experience on old loans. The relative importance of the factors used in explaining the past repayment performance then forecasts repayment probabilities on new loans; that is can be used for assessing the probability of repayment. Briefly we divide old loans (i) into two observational groups; those that defaulted (Zi = 1) and those that did not default (Zi = 0). Then we relate these observations by linear regression to s set of j casual variables (Xij) that reflects quantative information about the ith borrower, such as leverage or earnings. We estimate the model by linear regression of: Zi = ÃŽ £ÃŽ ²jXij + error Where ÃŽ ²j is the estimated importance of the jth variable in explaining past repayment experience. If we then take these estimated ÃŽ ²js and multiply them by the observed Xij for a prospective borrower, we can derive an expected value of Zi for the probability of repayment on the loan. LOGIT MODEL: The objective of the typical credit or loan review model is to replicate judgments made by loan officers, credit managers or bank examiners. If an accurate model could be developed, then it could be used as a tool for reviewing and classifying future credit risks. Chesser (1974) developed a model to predict noncompliance with the customers original loan arrangement, where non-compliance is defined to include not only default but any workout that may have been arranged resulting in a settlement of the loan less favorable to the tender than the original agreement. Chessers model, which was based on a technique called logit analysis, consisted of the following six variables. X1 = (Cash + Marketable Securities)/Total Assets X2 = Net Sales/(Cash + Marketable Securities) X3 = EBIT/Total Assets X4 = Total Debt/Total Assets X5 = Total Assets/ Net Worth X6 = Working Capital/Net Sales The estimated coefficients, including an intercept term, are Y = -2.0434 -5.24X1 + 0.0053X2 6.6507X3 + 4.4009X4 0.0791X5 0.1020X6 Chessers classification rule for above equation is If P> 50, assign to the non compliance group and If P≠¤50, assign to the compliance group. LINEAR DISCRIMINANT MODEL: While linear probability and logit models project a value foe the expected probability of default if a loan is made, discriminant models divide borrowers into high or default risk classes contingent on their observed characteristic (X). Altmans Z-score model is an application of multivariate Discriminant analysis in credit risk modeling. Financial ratios measuring probability, liquidity and solvency appeared to have significant discriminating power to separate the firm that fails to service its debt from the firms that do not. These ratios are weighted to produce a measure (credit risk score) that can be used as a metric to differentiate the bad firms from the set of good ones. Discriminant analysis is a multivariate statistical technique that analyzes a set of variables in order to differentiate two or more groups by minimizing the within-group variance and maximizing the between group variance simultaneously. Variables taken were: X1::Working Capital/ Total Asset X2: Retained Earning/ Total Asset X3: Earning before interest and taxes/ Total Asset X4: Market value of equity/ Book value of total Liabilities X5: Sales/Total Asset The original Z-score model was revised and modified several times in order to find the scoring model more specific to a particular class of firm. These resulted in the private firms Z-score model, non manufacturers Z-score model and Emerging Market Scoring (EMS) model. 3.2 New Approaches TERM STRUCTURE DERIVATION OF CREDIT RISK: One market based method of assessing credit risk exposure and default probabilities is to analyze the risk premium inherent in the current structure of yields on corporate debt or loans to similar risk-rated borrowers. Rating agencies categorize corporate bond issuers into at least seven major classes according to perceived credit quality. The first four ratings AAA, AA, A and BBB indicate investment quality borrowers. MORTALITY RATE APPROACH: Rather than extracting expected default rates from the current term structure of interest rates, the FI manager may analyze the historic or past default experience the mortality rates, of bonds and loans of a similar quality. Here p1is the probability of a grade B bond surviving the first year of its issue; thus 1 p1 is the marginal mortality rate, or the probability of the bond or loan dying or defaulting in the first year while p2 is the probability of the loan surviving in the second year and that it has not defaulted in the first year, 1-p2 is the marginal mortality rate for the second year. Thus, for each grade of corporate buyer quality, a marginal mortality rate (MMR) curve can show the historical default rate in any specific quality class in each year after issue. RAROC MODELS: Based on a banks risk-bearing capacity and its risk strategy, it is thus necessary — bearing in mind the banks strategic orientation — to find a method for the efficient allocation of capital to the banks individual siness areas, i.e. to define indicators that are suitable for balancing risk and return in a sensible manner. Indicators fulfilling this requirement are often referred to as risk adjusted performance measures (RAPM). RARORAC (risk adjusted return on risk adjusted capital, usually abbreviated as the most commonly found forms are RORAC (return on risk adjusted capital), Net income is taken to mean income minus refinancing cost, operating cost, and expected losses. It should now be the banks goal to maximize a RAPM indicator for the bank as a whole, e.g. RORAC, taking into account the correlation between individual transactions. Certain constraints such as volume restrictions due to a potential lack of liquidity and the maintenance of solvency based on economic and regulatory capital have to be observed in reaching this goal. From an organizational point of view, value and risk management should therefore be linked as closely as possible at all organizational levels. OPTION MODELS OF DEFAULT RISK (kmv model): KMV Corporation has developed a credit risk model that uses information on the stock prices and the capital structure of the firm to estimate its default probability. The starting point of the model is the proposition that a firm will default only if its asset value falls below a certain level, which is function of its liability. It estimates the asset value of the firm and its asset volatility from the market value of equity and the debt structure in the option theoretic framework. The resultant probability is called Expected default Frequency (EDF). In summary, EDF is calculated in the following three steps: i) Estimation of asset value and volatility from the equity value and volatility of equity return. ii) Calculation of distance from default iii) Calculation of expected default frequency Credit METRICS: It provides a method for estimating the distribution of the value of the assets n a portfolio subject to change in the credit quality of individual borrower. A portfolio consists of different stand-alone assets, defined by a stream of future cash flows. Each asset has a distribution over the possible range of future rating class. Starting from its initial rating, an asset may end up in ay one of the possible rating categories. Each rating category has a different credit spread, which will be used to discount the future cash flows. Moreover, the assets are correlated among themselves depending on the industry they belong to. It is assumed that the asset returns are normally distributed and change in the asset returns causes the change in the rating category in future. Finally, the simulation technique is used to estimate the value distribution of the assets. A number of scenario are generated from a multivariate normal distribution, which is defined by the appropriate credit spread, t he future value of asset is estimated. CREDIT Risk+: CreditRisk+, introduced by Credit Suisse Financial Products (CSFP), is a model of default risk. Each asset has only two possible end-of-period states: default and non-default. In the event of default, the lender recovers a fixed proportion of the total expense. The default rate is considered as a continuous random variable. It does not try to estimate default correlation directly. Here, the default correlation is assumed to be determined by a set of risk factors. Conditional on these risk factors, default of each obligator follows a Bernoulli distribution. To get unconditional probability generating function for the number of defaults, it assumes that the risk factors are independently gamma distributed random variables. The final step in Creditrisk+ is to obtain the probability generating function for losses. Conditional on the number of default events, the losses are entirely determined by the exposure and recovery rate. Thus, the distribution of asset can be estimated from the fol lowing input data: i) Exposure of individual asset ii) Expected default rate iii) Default ate volatilities iv) Recovery rate given default 3.3 CREDIT PRICING Pricing of the credit is essential for the survival of enterprises relying on credit assets, because the benefits derived from extending credit should surpass the cost. With the introduction of capital adequacy norms, the credit risk is linked to the capital-minimum 8% capital adequacy. Consequently, higher capital is required to be deployed if more credit risks are underwritten. The decision (a) whether to maximize the returns on possible credit assets with the existing capital or (b) raise more capital to do more business invariably depends upon p Credit Risk Dissertation Credit Risk Dissertation CREDIT RISK EXECUTIVE SUMMARY The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The major cause of serious banking problems over the years continues to be directly related to lax credit standards for borrowers and counterparties, poor portfolio risk management, or a lack of attention to deterioration in the credit standing of a banks counterparties. Credit risk is the oldest and biggest risk that bank, by virtue of its very nature of business, inherits. This has however, acquired a greater significance in the recent past for various reasons. There have been many traditional approaches to measure credit risk like logit, linear probability model but with passage of time new approaches have been developed like the Credit+, KMV Model. Basel I Accord was introduced in 1988 to have a framework for regulatory capital for banks but the â€Å"one size fit all† approach led to a shift, to a new and comprehensive approach -Basel II which adopts a three pillar approach to risk management. Banks use a number of techniques to mitigate the credit risks to which they are exposed. RBI has prescribed adoption of comprehensive approach for the purpose of CRM which allows fuller offset of security of collateral against exposures by effectively reducing the exposure amount by the value ascribed to the collateral. In this study, a leading nationalized bank is taken to study the steps taken by the bank to implement the Basel- II Accord and the entire framework developed for credit risk management. The bank under the study uses the credit scoring method to evaluate the credit risk involved in various loans/advances. The bank has set up special software to evaluate each case under various parameters and a monitoring system to continuously track each assets performance in accordance with the evaluation parameters. CHAPTER 1 INTRODUCTION 1.1 Rationale Credit Risk Management in todays deregulated market is a big challenge. Increased market volatility has brought with it the need for smart analysis and specialized applications in managing credit risk. A well defined policy framework is needed to help the operating staff identify the risk-event, assign a probability to each, quantify the likely loss, assess the acceptability of the exposure, price the risk and monitor them right to the point where they are paid off. Generally, Banks in India evaluate a proposal through the traditional tools of project financing, computing maximum permissible limits, assessing management capabilities and prescribing a ceiling for an industry exposure. As banks move in to a new high powered world of financial operations and trading, with new risks, the need is felt for more sophisticated and versatile instruments for risk assessment, monitoring and controlling risk exposures. It is, therefore, time that banks managements equip them fully to grapple with the demands of creating tools and systems capable of assessing, monitoring and controlling risk exposures in a more scientific manner. According to an estimate, Credit Risk takes about 70% and 30% remaining is shared between the other two primary risks, namely Market risk (change in the market price and operational risk i.e., failure of internal controls, etc.). Quality borrowers (Tier-I borrowers) were able to access the capital market directly without going through the debt route. Hence, the credit route is now more open to lesser mortals (Tier-II borrowers). With margin levels going down, banks are unable to absorb the level of loan losses. Even in banks which regularly fine-tune credit policies and streamline credit processes, it is a real challenge for credit risk managers to correctly identify pockets of risk concentration, quantify extent of risk carried, identify opportunities for diversification and balance the risk-return trade-off in their credit portfolio. The management of banks should strive to embrace the notion of ‘uncertainty and risk in their balance sheet and instill the need for approaching credit administration from a ‘risk-perspective across the system by placing well drafted strategies in the hands of the operating staff with due material support for its successful implementation. There is a need for Strategic approach to Credit Risk Management (CRM) in Indian Commercial Banks, particularly in view of; (1) Higher NPAs level in comparison with global benchmark (2) RBI s stipulation about dividend distribution by the banks (3) Revised NPAs level and CAR norms (4) New Basel Capital Accord (Basel -II) revolution 1.2 OBJECTIVES To understand the conceptual framework for credit risk. To understand credit risk under the Basel II Accord. To analyze the credit risk management practices in a Leading Nationalised Bank 1.3 RESEARCH METHODOLOGY Research Design: In order to have more comprehensive definition of the problem and to become familiar with the problems, an extensive literature survey was done to collect secondary data for the location of the various variables, probably contemporary issues and the clarity of concepts. Data Collection Techniques: The data collection technique used is interviewing. Data has been collected from both primary and secondary sources. Primary Data: is collected by making personal visits to the bank. Secondary Data: The details have been collected from research papers, working papers, white papers published by various agencies like ICRA, FICCI, IBA etc; articles from the internet and various journals. 1.4 LITERATURE REVIEW * Merton (1974) has applied options pricing model as a technology to evaluate the credit risk of enterprise, it has been drawn a lot of attention from western academic and business circles.Mertons Model is the theoretical foundation of structural models. Mertons model is not only based on a strict and comprehensive theory but also used market information stock price as an important variance toevaluate the credit risk.This makes credit risk to be a real-time monitored at a much higher frequency.This advantage has made it widely applied by the academic and business circle for a long time. Other Structural Models try to refine the original Merton Framework by removing one or more of unrealistic assumptions. * Black and Cox (1976) postulate that defaults occur as soon as firms asset value falls below a certain threshold. In contrast to the Merton approach, default can occur at any time. The paper by Black and Cox (1976) is the first of the so-called First Passage Models (FPM). First passage models specify default as the first time the firms asset value hits a lower barrier, allowing default to take place at any time. When the default barrier is exogenously fixed, as in Black and Cox (1976) and Longstaff and Schwartz (1995), it acts as a safety covenant to protect bondholders. Black and Cox introduce the possibility of more complex capital structures, with subordinated debt. * Geske (1977) introduces interest-paying debt to the Merton model. * Vasicek (1984) introduces the distinction between short and long term liabilities which now represents a distinctive feature of the KMV model. Under these models, all the relevant credit risk elements, including default and recovery at default, are a function of the structural characteristics of the firm: asset levels, asset volatility (business risk) and leverage (financial risk). * Kim, Ramaswamy and Sundaresan (1993) have suggested an alternative approach which still adopts the original Merton framework as far as the default process is concerned but, at the same time, removes one of the unrealistic assumptions of the Merton model; namely, that default can occur only at maturity of the debt when the firms assets are no longer sufficient to cover debt obligations. Instead, it is assumed that default may occur anytime between the issuance and maturity of the debt and that default is triggered when the value of the firms assets reaches a lower threshold level. In this model, the RR in the event of default is exogenous and independent from the firms asset value. It is generally defined as a fixed ratio of the outstanding debt value and is therefore independent from the PD. The attempt to overcome the shortcomings of structural-form models gave rise to reduced-form models. Unlike structural-form models, reduced-form models do not condition default on the value of the firm, and parameters related to the firms value need not be estimated to implement them. * Jarrow and Turnbull (1995) assumed that, at default, a bond would have a market value equal to an exogenously specified fraction of an otherwise equivalent default-free bond. * Duffie and Singleton (1999) followed with a model that, when market value at default (i.e. RR) is exogenously specified, allows for closed-form solutions for the term-structure of credit spreads. * Zhou (2001) attempt to combine the advantages of structural-form models a clear economic mechanism behind the default process, and the ones of reduced- form models unpredictability of default. This model links RRs to the firm value at default so that the variation in RRs is endogenously generated and the correlation between RRs and credit ratings reported first in Altman (1989) and Gupton, Gates and Carty (2000) is justified. Lately portfolio view on credit losses has emerged by recognising that changes in credit quality tend to comove over the business cycle and that one can diversify part of the credit risk by a clever composition of the loan portfolio across regions, industries and countries. Thus in order to assess the credit risk of a loan portfolio, a bank must not only investigate the creditworthiness of its customers, but also identify the concentration risks and possible comovements of risk factors in the portfolio. * CreditMetrics by Gupton et al (1997) was publicized in 1997 by JP Morgan. Its methodology is based on probability of moving from one credit quality to another within a given time horizon (credit migration analysis). The estimation of the portfolio Value-at-Risk due to Credit (Credit-VaR) through CreditMetrics A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. A rating system with probabilities of migrating from one credit quality to another over a given time horizon (transition matrix) is the key component of the credit-VaR proposed by JP Morgan. The specified credit risk horizon is usually one year. * (Sy, 2007), states that the primary cause of credit default is loan delinquency due to insufficient liquidity or cash flow to service debt obligations. In the case of unsecured loans, we assume delinquency is a necessary and sufficient condition. In the case of collateralized loans, delinquency is a necessary, but not sufficient condition, because the borrower may be able to refinance the loan from positive equity or net assets to prevent default. In general, for secured loans, both delinquency and insolvency are assumed necessary and sufficient for credit default. CHAPTER 2 THEORECTICAL FRAMEWORK 2.1 CREDIT RISK: Credit risk is risk due to uncertainty in a counterpartys (also called an obligors or credits) ability to meet its obligations. Because there are many types of counterparties—from individuals to sovereign governments—and many different types of obligations—from auto loans to derivatives transactions—credit risk takes many forms. Institutions manage it in different ways. Although credit losses naturally fluctuate over time and with economic conditions, there is (ceteris paribus) a statistically measured, long-run average loss level. The losses can be divided into two categories i.e. expected losses (EL) and unexpected losses (UL). EL is based on three parameters:  ·Ã¢â€š ¬Ã‚   The likelihood that default will take place over a specified time horizon (probability of default or PD)  · â‚ ¬Ã‚  The amount owned by the counterparty at the moment of default (exposure at default or EAD)  ·Ã¢â€š ¬Ã‚   The fraction of the exposure, net of any recoveries, which will be lost following a default event (loss given default or LGD). EL = PD x EAD x LGD EL can be aggregated at various different levels (e.g. individual loan or entire credit portfolio), although it is typically calculated at the transaction level; it is normally mentioned either as an absolute amount or as a percentage of transaction size. It is also both customer- and facility-specific, since two different loans to the same customer can have a very different EL due to differences in EAD and/or LGD. It is important to note that EL (or, for that matter, credit quality) does not by itself constitute risk; if losses always equaled their expected levels, then there would be no uncertainty. Instead, EL should be viewed as an anticipated â€Å"cost of doing business† and should therefore be incorporated in loan pricing and ex ante provisioning. Credit risk, in fact, arises from variations in the actual loss levels, which give rise to the so-called unexpected loss (UL). Statistically speaking, UL is simply the standard deviation of EL. UL= ÏÆ' (EL) = ÏÆ' (PD*EAD*LGD) Once the bank- level credit loss distribution is constructed, credit economic capital is simply determined by the banks tolerance for credit risk, i.e. the bank needs to decide how much capital it wants to hold in order to avoid insolvency because of unexpected credit losses over the next year. A safer bank must have sufficient capital to withstand losses that are larger and rarer, i.e. they extend further out in the loss distribution tail. In practice, therefore, the choice of confidence interval in the loss distribution corresponds to the banks target credit rating (and related default probability) for its own debt. As Figure below shows, economic capital is the difference between EL and the selected confidence interval at the tail of the loss distribution; it is equal to a multiple K (often referred to as the capital multiplier) of the standard deviation of EL (i.e. UL). The shape of the loss distribution can vary considerably depending on product type and borrower credit quality. For example, high quality (low PD) borrowers tend to have proportionally less EL per unit of capital charged, meaning that K is higher and the shape of their loss distribution is more skewed (and vice versa). Credit risk may be in the following forms: * In case of the direct lending * In case of the guarantees and the letter of the credit * In case of the treasury operations * In case of the securities trading businesses * In case of the cross border exposure 2.2 The need for Credit Risk Rating: The need for Credit Risk Rating has arisen due to the following: 1. With dismantling of State control, deregulation, globalisation and allowing things to shape on the basis of market conditions, Indian Industry and Indian Banking face new risks and challenges. Competition results in the survival of the fittest. It is therefore necessary to identify these risks, measure them, monitor and control them. 2. It provides a basis for Credit Risk Pricing i.e. fixation of rate of interest on lending to different borrowers based on their credit risk rating thereby balancing Risk Reward for the Bank. 3. The Basel Accord and consequent Reserve Bank of India guidelines requires that the level of capital required to be maintained by the Bank will be in proportion to the risk of the loan in Banks Books for measurement of which proper Credit Risk Rating system is necessary. 4. The credit risk rating can be a Risk Management tool for prospecting fresh borrowers in addition to monitoring the weaker parameters and taking remedial action. The types of Risks Captured in the Banks Credit Risk Rating Model The Credit Risk Rating Model provides a framework to evaluate the risk emanating from following main risk categorizes/risk areas: * Industry risk * Business risk * Financial risk * Management risk * Facility risk * Project risk 2.3 WHY CREDIT RISK MEASUREMENT? In recent years, a revolution is brewing in risk as it is both managed and measured. There are seven reasons as to why certain surge in interest: 1. Structural increase in bankruptcies: Although the most recent recession hit at different time in different countries, most statistics show a significant increase in bankruptcies, compared to prior recession. To the extent that there has been a permanent or structural increase in bankruptcies worldwide- due to increase in the global competition- accurate credit analysis become even more important today than in past. 2. Disintermediation: As capital markets have expanded and become accessible to small and mid sized firms, the firms or borrowers â€Å"left behind† to raise funds from banks and other traditional financial institutions (FIs) are likely to be smaller and to have weaker credit ratings. Capital market growth has produced â€Å"a winners† curse effect on the portfolios of traditional FIs. 3. More Competitive Margins: Almost paradoxically, despite the decline in the average quality of loans, interest margins or spreads, especially in wholesale loan markets have become very thin. In short, the risk-return trade off from lending has gotten worse. A number of reasons can be cited, but an important factor has been the enhanced competition for low quality borrowers especially from finance companies, much of whose lending activity has been concentrated at the higher risk/lower quality end of the market. 4. Declining and Volatile Values of Collateral: Concurrent with the recent Asian and Russian debt crisis in well developed countries such as Switzerland and Japan have shown that property and real assets value are very hard to predict, and to realize through liquidation. The weaker (and more uncertain) collateral values are, the riskier the lending is likely to be. Indeed the current concerns about deflation worldwide have been accentuated the concerns about the value of real assets such as property and other physical assets. 5. The Growth Of Off- Balance Sheet Derivatives: In many of the very large U.S. banks, the notional value of the off-balance-sheet exposure to instruments such as over-the-counter (OTC) swaps and forwards is more than 10 times the size of their loan books. Indeed the growth in credit risk off the balance sheet was one of the main reasons for the introduction, by the Bank for International Settlements (BIS), of risk based capital requirements in 1993. Under the BIS system, the banks have to hold a capital requirement based on the mark- to- market current values of each OTC Derivative contract plus an add on for potential future exposure. 6. Technology Advances in computer systems and related advances in information technology have given banks and FIs the opportunity to test high powered modeling techniques. A survey conducted by International Swaps and Derivatives Association and the Institute of International Finance in 2000 found that survey participants (consisting of 25 commercial banks from 10 countries, with varying size and specialties) used commercial and internal databases to assess the credit risk on rated and unrated commercial, retail and mortgage loans. 7. The BIS Risk-Based Capital Requirements Despite the importance of above six reasons, probably the greatest incentive for banks to develop new credit risk models has been dissatisfaction with the BIS and central banks post-1992 imposition of capital requirements on loans. The current BIS approach has been described as a ‘one size fits all policy, irrespective of the size of loan, its maturity, and most importantly, the credit quality of the borrowing party. Much of the current interest in fine tuning credit risk measurement models has been fueled by the proposed BIS New Capital Accord (or so Called BIS II) which would more closely link capital charges to the credit risk exposure to retail, commercial, sovereign and interbank credits. Chapter- 3 Credit Risk Approaches and Pricing 3.1 CREDIT RISK MEASUREMENT APPROACHES: 1. CREDIT SCORING MODELS Credit Scoring Models use data on observed borrower characteristics to calculate the probability of default or to sort borrowers into different default risk classes. By selecting and combining different economic and financial borrower characteristics, a bank manager may be able to numerically establish which factors are important in explaining default risk, evaluate the relative degree or importance of these factors, improve the pricing of default risk, be better able to screen out bad loan applicants and be in a better position to calculate any reserve needed to meet expected future loan losses. To employ credit scoring model in this manner, the manager must identify objective economic and financial measures of risk for any particular class of borrower. For consumer debt, the objective characteristics in a credit -scoring model might include income, assets, age occupation and location. For corporate debt, financial ratios such as debt-equity ratio are usually key factors. After data are identified, a statistical technique quantifies or scores the default risk probability or default risk classification. Credit scoring models include three broad types: (1) linear probability models, (2) logit model and (3) linear discriminant model. LINEAR PROBABILITY MODEL: The linear probability model uses past data, such as accounting ratios, as inputs into a model to explain repayment experience on old loans. The relative importance of the factors used in explaining the past repayment performance then forecasts repayment probabilities on new loans; that is can be used for assessing the probability of repayment. Briefly we divide old loans (i) into two observational groups; those that defaulted (Zi = 1) and those that did not default (Zi = 0). Then we relate these observations by linear regression to s set of j casual variables (Xij) that reflects quantative information about the ith borrower, such as leverage or earnings. We estimate the model by linear regression of: Zi = ÃŽ £ÃŽ ²jXij + error Where ÃŽ ²j is the estimated importance of the jth variable in explaining past repayment experience. If we then take these estimated ÃŽ ²js and multiply them by the observed Xij for a prospective borrower, we can derive an expected value of Zi for the probability of repayment on the loan. LOGIT MODEL: The objective of the typical credit or loan review model is to replicate judgments made by loan officers, credit managers or bank examiners. If an accurate model could be developed, then it could be used as a tool for reviewing and classifying future credit risks. Chesser (1974) developed a model to predict noncompliance with the customers original loan arrangement, where non-compliance is defined to include not only default but any workout that may have been arranged resulting in a settlement of the loan less favorable to the tender than the original agreement. Chessers model, which was based on a technique called logit analysis, consisted of the following six variables. X1 = (Cash + Marketable Securities)/Total Assets X2 = Net Sales/(Cash + Marketable Securities) X3 = EBIT/Total Assets X4 = Total Debt/Total Assets X5 = Total Assets/ Net Worth X6 = Working Capital/Net Sales The estimated coefficients, including an intercept term, are Y = -2.0434 -5.24X1 + 0.0053X2 6.6507X3 + 4.4009X4 0.0791X5 0.1020X6 Chessers classification rule for above equation is If P> 50, assign to the non compliance group and If P≠¤50, assign to the compliance group. LINEAR DISCRIMINANT MODEL: While linear probability and logit models project a value foe the expected probability of default if a loan is made, discriminant models divide borrowers into high or default risk classes contingent on their observed characteristic (X). Altmans Z-score model is an application of multivariate Discriminant analysis in credit risk modeling. Financial ratios measuring probability, liquidity and solvency appeared to have significant discriminating power to separate the firm that fails to service its debt from the firms that do not. These ratios are weighted to produce a measure (credit risk score) that can be used as a metric to differentiate the bad firms from the set of good ones. Discriminant analysis is a multivariate statistical technique that analyzes a set of variables in order to differentiate two or more groups by minimizing the within-group variance and maximizing the between group variance simultaneously. Variables taken were: X1::Working Capital/ Total Asset X2: Retained Earning/ Total Asset X3: Earning before interest and taxes/ Total Asset X4: Market value of equity/ Book value of total Liabilities X5: Sales/Total Asset The original Z-score model was revised and modified several times in order to find the scoring model more specific to a particular class of firm. These resulted in the private firms Z-score model, non manufacturers Z-score model and Emerging Market Scoring (EMS) model. 3.2 New Approaches TERM STRUCTURE DERIVATION OF CREDIT RISK: One market based method of assessing credit risk exposure and default probabilities is to analyze the risk premium inherent in the current structure of yields on corporate debt or loans to similar risk-rated borrowers. Rating agencies categorize corporate bond issuers into at least seven major classes according to perceived credit quality. The first four ratings AAA, AA, A and BBB indicate investment quality borrowers. MORTALITY RATE APPROACH: Rather than extracting expected default rates from the current term structure of interest rates, the FI manager may analyze the historic or past default experience the mortality rates, of bonds and loans of a similar quality. Here p1is the probability of a grade B bond surviving the first year of its issue; thus 1 p1 is the marginal mortality rate, or the probability of the bond or loan dying or defaulting in the first year while p2 is the probability of the loan surviving in the second year and that it has not defaulted in the first year, 1-p2 is the marginal mortality rate for the second year. Thus, for each grade of corporate buyer quality, a marginal mortality rate (MMR) curve can show the historical default rate in any specific quality class in each year after issue. RAROC MODELS: Based on a banks risk-bearing capacity and its risk strategy, it is thus necessary — bearing in mind the banks strategic orientation — to find a method for the efficient allocation of capital to the banks individual siness areas, i.e. to define indicators that are suitable for balancing risk and return in a sensible manner. Indicators fulfilling this requirement are often referred to as risk adjusted performance measures (RAPM). RARORAC (risk adjusted return on risk adjusted capital, usually abbreviated as the most commonly found forms are RORAC (return on risk adjusted capital), Net income is taken to mean income minus refinancing cost, operating cost, and expected losses. It should now be the banks goal to maximize a RAPM indicator for the bank as a whole, e.g. RORAC, taking into account the correlation between individual transactions. Certain constraints such as volume restrictions due to a potential lack of liquidity and the maintenance of solvency based on economic and regulatory capital have to be observed in reaching this goal. From an organizational point of view, value and risk management should therefore be linked as closely as possible at all organizational levels. OPTION MODELS OF DEFAULT RISK (kmv model): KMV Corporation has developed a credit risk model that uses information on the stock prices and the capital structure of the firm to estimate its default probability. The starting point of the model is the proposition that a firm will default only if its asset value falls below a certain level, which is function of its liability. It estimates the asset value of the firm and its asset volatility from the market value of equity and the debt structure in the option theoretic framework. The resultant probability is called Expected default Frequency (EDF). In summary, EDF is calculated in the following three steps: i) Estimation of asset value and volatility from the equity value and volatility of equity return. ii) Calculation of distance from default iii) Calculation of expected default frequency Credit METRICS: It provides a method for estimating the distribution of the value of the assets n a portfolio subject to change in the credit quality of individual borrower. A portfolio consists of different stand-alone assets, defined by a stream of future cash flows. Each asset has a distribution over the possible range of future rating class. Starting from its initial rating, an asset may end up in ay one of the possible rating categories. Each rating category has a different credit spread, which will be used to discount the future cash flows. Moreover, the assets are correlated among themselves depending on the industry they belong to. It is assumed that the asset returns are normally distributed and change in the asset returns causes the change in the rating category in future. Finally, the simulation technique is used to estimate the value distribution of the assets. A number of scenario are generated from a multivariate normal distribution, which is defined by the appropriate credit spread, t he future value of asset is estimated. CREDIT Risk+: CreditRisk+, introduced by Credit Suisse Financial Products (CSFP), is a model of default risk. Each asset has only two possible end-of-period states: default and non-default. In the event of default, the lender recovers a fixed proportion of the total expense. The default rate is considered as a continuous random variable. It does not try to estimate default correlation directly. Here, the default correlation is assumed to be determined by a set of risk factors. Conditional on these risk factors, default of each obligator follows a Bernoulli distribution. To get unconditional probability generating function for the number of defaults, it assumes that the risk factors are independently gamma distributed random variables. The final step in Creditrisk+ is to obtain the probability generating function for losses. Conditional on the number of default events, the losses are entirely determined by the exposure and recovery rate. Thus, the distribution of asset can be estimated from the fol lowing input data: i) Exposure of individual asset ii) Expected default rate iii) Default ate volatilities iv) Recovery rate given default 3.3 CREDIT PRICING Pricing of the credit is essential for the survival of enterprises relying on credit assets, because the benefits derived from extending credit should surpass the cost. With the introduction of capital adequacy norms, the credit risk is linked to the capital-minimum 8% capital adequacy. Consequently, higher capital is required to be deployed if more credit risks are underwritten. The decision (a) whether to maximize the returns on possible credit assets with the existing capital or (b) raise more capital to do more business invariably depends upon p

Strangely Ordinary People Essay -- Movie Film Analysis

The movie â€Å"Ordinary People† was a very entertaining and educational movie. It looked into the dynamics of families and showed the different parts and dependencies. It also looked into a type of client/therapist relationship and how it evolved over time. The discussion below will attempt to explore deeper into these aspect of the film. Throughout the film a focus on family and the dynamics is prominent. A traumatic event, the loss of a son, brother, and friend, has influenced the Jarrett greatly. Due to the circumstances in which Conrad, a severely depressed teenager and the main character, was present during the death of his brother, feelings of guilt had built up in this young man. A great deal of stress and tension is built between the family members because of this tragic accident. Here is where the concept of, change in one part of the familial system reverberates through out other parts. (Duty, 2010) The relationship between the Conrad and his mother become even more absent because, in the film it is presented to show that the mother blames and has not forgiven Conrad for the death of his brother Buck. Six months after the death of his brother Conrad attempts suicide with razors in the bathroom of his home. His parents commit him to a psychiatric hospital and eight months later, he is trying to resume his â €Å"old† life. Conrad is socially withdrawn from his friends because of all he has experienced as well as the fact that he was held back in school due to missing so many days. The importance of his family and support is validated here. When looking at one of the most important challenges facing families today, the challenge of instilling â€Å"in its members a sense of belonging while also allowing members to individuate† is s... ...t it does not exist. The rapport and friendship built throughout this movie is vital to the success of the therapy exhibited here. This is a great example of Gestalt therapeutic approach and helps to identify most of the techniques incorporated. The techniques and ways of gently confronting but pushing a client all the way through are very beneficial to each viewer of this film. Works Cited Duty, G. (2010, December 10). Family Systems Therapy. Lecture presented at Principles of Counseling Class Notes, Bethany. Miller, F. C. (1999, September). Using the Movie Ordinary People to Teach Psychodynamic Psychotherapy With Adolescents -- Miller 23 (3): 174 -- Acad Psychiatry. Academic Psychiatry. Retrieved December 10, 2010, from http://ap.psychiatryonline.org/cgi/content/full/23/3/174 Redford, R. (Director). (1980). Ordinary people [Motion picture on DVD

American History-Cold War

This work is an effort to acknowledge the Korean War. This is not an attempt to provide a history. The purpose of this work is to consider the argument that the Korean War was a natural extension of the Cold War and would not have been fought if relations with the U. S and Russia/China were not cold. Many see the Korean War as a mystery. Some parts of it seem almost immune to study and understanding. Statistics tell some things, and chronological narratives can provide a story upon which to hang data and factual information.But the problem is simply that people still do not know very much about the war. It was so complex, both in terms of its causes, and of the progress of the fighting, that the usual methods of reporting do not always tell a clear story. It was (and is) a significant part of American history, and within it are located keys to understanding America's highly transitional role in the increasingly complex world events of the time. The outbreak of the Korean War in 1950 was one of the great sea changes in postwar American history. Like the Trojan horse sent into Troy, President Harry S.Truman's June 1950 decision to intervene in the Korean crisis laid the nation bare to a bombardment of economic, political, military, and social changes. As it turned out, the Korean mobilization went far beyond preparations for America's first undeclared war; it evolved into the nation's de facto Cold War preparedness program, which came to span nearly forty years. The Korean War, which began with the invasion of the Republic of South Korea in June of 1950, can be more easily understood if we consider it as two, perhaps even three, wars.The first phase was between the United Nations and the Democratic People's Republic of North Korea. This period can be considered a victory for the United Nations. Surely there is no other word for the successful landing at Inchon in September 1950, the recapture of the South Korean capital of Seoul, and the approach, by Eighth Army on the west and X Corps on the east, to the Yalu. By the middle of November, the forces of the United Nations had scattered the troops of North Korea's army and occupied most of its territory. The goals of the United Nations, to drive the invader from South Korea, had been accomplished.The second phase, which General of the Army Douglas MacArthur called â€Å"an entirely new war,† began with the Chinese entry into the conflict. This phase must be considered much less successful. In the light of the goals established for the second stage of the war – to expel the Communist Chinese and to occupy and control the territory of North Korea – the war was a failure. But somewhere during the second year of fighting, around November 1951, the nature of the goals changed again. This change may be sufficient to define a third phase of the war.The third phase was marked by the decision to take a defensive posture in Korea. After the defeat at the Chosin reservoir and the slo w United Nations return to the 38th Parallel military victory seemed to be too great a goal. The war became one of attrition, not unlike World War I. The third phase was one of waiting, patrolling, skirmishing, destroying supplies, and attacking to kill rather than to occupy, and negotiating. If the legitimate purpose of war is to create a more perfect peace, as some have suggested, then phase three of the Korean War was its most important.Certainly the long-term goals, as well as the short-term reactions, seemed to be more directed at an easing of the Cold War than at victory in Korea. The decision made by President Harry S. Truman and his advisors to enter the war in defense of South Korea was one of major significance. Some historians believe it may have been predetermined by earlier events leading up to the invasion. On the surface, however, the decision looks like a rather abrupt shift in the administration's policy concerning Korea. The reaction gave Korea more importance than it had previously held for Americans.Later, when Truman authorized General MacArthur to move across the 38th, and seek the occupation of North Korea, that decision did not appear so much out of character. In the final analysis, however, this latter decision introduced a period of military defeat, public concern, and political difficulty. There is much about the fighting during the Korean War that, in an overview, appears paradoxical. The tremendous technological advances made during World War II paid off between 1945 and 1955. Weapon development moved quickly and weapons became more and more complex.Nevertheless, the Korean War was primarily fought with weapons left over from World War II. To a significant degree it was also fought with the strategies and often with the commanders, of that war. It was war fought in the beginning by untrained and unprepared occupation troops, then by â€Å"retreads† (recalled World War II veterans), then by draftees caught up in one of the lo osest conscription nets in modern history. Of course, it was a war in which military methodology and expectancy were severely limited.Finally, we can say that the Korean War verified Clausewitz's understanding that a limited war can be true to its defined goals only as long as it remains subject to political (civilian) control. The Korean War emphatically marked the end of the post-Second World War era. The Sovietization of Eastern Europe, the Greek civil war, the Czech coup, and the Berlin Airlift, not to mention the â€Å"loss† of China to the communists, had all served to erode what had remained of the wartime â€Å"Grand Alliance† between the United States, Great Britain and the Soviet Union that had persisted through the war and to the establishment of the United Nations.But with American, British, French, Dutch, Canadian, Australian, New Zealand, South African, Greek, Turkish, Filipino and Thai troops actually engaged in combat with Communist forces, the Cold War seemed obviously to have taken on a new and far more bitter dimension, and indeed, might no longer even merit the term â€Å"Cold War†. In the words of one scholar, â€Å"Without the Cold War there would have been no Korean War† (Mcmahon 69) In fact, the entry of China into the conflict in late 1950 unleashed apocalyptic imaginings of a Third World War, particularly amongst Americans.Even after the Armistice concluding the Korean War, the Cold War would continue for more than four decades. The Korean War marked a pivotal turning point in the global execution of the Cold War. To understand the larger context—the Cold War—is to understand how and why Korea fundamentally altered the political and economic scene in the United States. First, Korea marked the militarization of Harry Truman's containment policy.Before June 1950, the United States tended to emphasize the economic aspects of containment, during which time it sought to build a strong, free-marketà ¢â‚¬â€based international order to serve as a bulwark against Soviet communism. Once the war in Korea began, however, the United States emphasized military rearmament—here and abroad—to resist perceived Soviet aggression. Second, by militarizing containment as it did, the Truman administration globalized it as well.After Korea, the nation prepared itself ideologically and militarily to resist the Sovietsin every corner of the world. Thus, in the final analysis, the Korean mobilization was a mobilization within a mobilization: the nation began arming for the Korean conflict in the short-term while simultaneously mobilizing for the Cold War in the long-term. Division and Cold War came to Korea first and foremost because of the inability of outside powers, the United States and the Soviet Union, to devise a unification plan that would protect the interests of both (Wainstock 36).From the start the two powers regarded internal political configurations as highly unpredicta ble, so they were disinclined to encourage creation of an indigenous government that crossed zonal boundaries. The best opportunity for the emergence of such a government came in September 1945 with the rise of the KPR, a group that possessed strong linkages with the people's committees at the local level. Had the Americans supported the KPR, thus encouraging the KDP to play coalition rather than class politics, Koreans might have taken the lead in developing a vision of a united, independent country unthreatening to the great powers.Yet the best opportunity in this case does not represent a good opportunity, since such an outcome would have required extraordinary patience and trust on all sides, ingredients that were far from common at the time. The unexpected invasion ushered in a new and much more dangerous phase of the Cold War, not just in Asia but globally. Certain that the attack could only have occurred with the backing of the Soviet Union and China – a correct assess ment, as nowavailable evidence confirms – and convinced that it heralded a bolder and more aggressive worldwide offensive by the communist powers, the Truman administration responded vigorously.It immediately dispatched US naval and air forces to Korea in order to stem the North Korean advance and bolster South Korean defences. When that initial intervention proved insufficient, the administration dispatched US combat troops, which became part of an international force owing to the UN's condemnation of the North Korean invasion. ‘The attack upon Korea makes it plain beyond all doubt’, declared Truman in a 27 June address to the American people, ‘that Communism has passed beyond the use of subversion to conquer independent nations and will use armed invasion and war’ (Malkasian 21).He also revealed, in that same speech, that he was ordering the US Seventh Fleet to the Taiwan Strait, increasing aid to the French in Indo—China, and speeding addit ional aid to the pro—American Philippine government which was battling the radical Huk insurgency. Behind those four interventions – in Korea, China, Indo—China, and the Philippines – lay the American perception that a unified threat of formidable proportions was being mounted against Western interests by a hostile and newly aggressive world communist movement under the leadership of the Soviet Union and its Chinese junior partner.The impact of the Cold War on the Korean War is difficult to overstate. Not only did the Korean fighting lead to an intensification and geographical expansion of the Cold War, threaten a wider conflict between the United States and the communist powers, and foster increased East–West hostility, but it also spurred a huge increase in American defence spending and, more broadly, a militarization and globalization of American foreign policy. Beyond Asia, the conflict in Korea also hastened the strengthening of NATO, the armi ng of Germany, and the stationing of US troops on European soil.‘It was the Korean War and not World War II that made the United States a world military—political power’, diplomat Charles Bohlen has argued. With uncommon unanimity, scholars have affirmed that judgement, identifying the Korean War as a key turning point in the international history of the postwar era. America's ‘real commitment to contain communism everywhere originated in the events surrounding the Korean War’, contends John Lewis Gaddis. Warren I.Cohen calls it ‘a war that would alter the nature of the Soviet—American confrontation, change it from a systemic political competition into an ideologically driven, militarized contest that threatened the very survival of the globe’ (Anthony 42). Yet, as Cohen also notes, ‘that a civil war in Korea would provide the critical turning point in the postwar Soviet—American relationship, and raise the possibilit y of world war, seems, in retrospect, nothing short of bizarre’ (Ball 15). Certainly, in the aftermath of World War II, few places appeared less likely to emerge as a focal point of great power competition.Occupied and ruled by Japan as a colony ever since 1910, Korea factored into wartime councils merely as yet another minor and obscure territory whose future disposition fell on the Allies' already overburdened shoulders. At the Potsdam Conference, the Americans and Soviets agreed to share occupation responsibilities there by temporarily dividing the country at the 38th parallel; they also agreed to work towards the establishment of an independent, unified Korea at the earliest practicable time.In December 1945, at a foreign ministers' meeting in Moscow, the Soviets accepted a US proposal for the establishment of a joint Soviet—American commission to prepare for the election of a provisional Korean government as a first step toward full independence. But that plan soo n fell victim to larger Cold War tensions that militated against any meaningful cooperation, or compromise, between Moscow and Washington. By 1948, the occupation divisions had instead hardened. In the north, a pro—Soviet regime under the leadership of the former antiJapanese fighter Kim took on all the trappings of an independent regime.So, too, did its counterpart in the south: a proAmerican regime headed by the virulently anti—communist Syngman Rhee, a Korean nationalist of long standing. Each side regularly rattled sabres at the other; neither North nor South Koreans could accept a permanent division of their homeland. In 1948, the Truman administration, seeking to extricate itself gracefully from its Korean commitment, began withdrawing US military forces from the peninsula. American defence planners believed not only that US military personnel had become overextended worldwide, necessitating this pullback, but that Korea, in fact, possessed minimal strategic wort h.The North Korean invasion two years later brought a different calculus to the fore. Although it might have lacked great intrinsic strategic value, Korea stood as a potent symbol, especially in view of America's role as midwife and protector of the Seoul regime. Further, the North Korean attack, sanctioned and backed by the Soviet Union and China, threatened America's credibility as a regional and global power every bit as much as it threatened the survival of the South Korean government. To Truman, Acheson, and other senior decision—makers, the stakes at risk in Korea appeared enormous.Consequently, without any dissenting voices being raised, the president quickly authorized US military intervention. ‘If the United Nations yields to the force of aggression’, Truman declared publicly on 30 November, ‘no nation will be safe or secure. If aggression is successful in Korea, we can expect it to spread throughout Asia and Europe to this hemisphere. We are fight ing in Korea for our own national security and survival’ (Roe 90) That statement came right after the entry of Chinese Communist ‘volunteer’ forces into the fray, a development that changed the character of the Korean conflict – and, arguably, the Cold War as well.Truman and his military advisers grew overconfident after MacArthur turned the tide of battle in September 1950 by outflanking the North Koreans with his legendary Inchon landing. The UN forces under his command crossed into North Korean territory on 7 October; by 25 October, some advance units reached the Yalu River, along the North Korean—Chinese border. As they inched closer to Chinese territory, Mao informed Stalin that he had decided to send Chinese troops across the Yalu.‘The reason’, he explained, ‘is that if we allow the United States to occupy all of Korea and Korean revolutionary strength suffers a fundamental defeat, then the Americans will run more rampant to the detriment of the entire East. ’ Mao, too, saw broad regional and global implications in the Korean outcome. MacArthur, who had so cavalierly underestimated the Chinese military threat and whose forces were almost completely driven out of North Korea by the end of November, informed the Joint Chiefs of Staff: ‘We face an entirely new war’ (Paige 12).The world faced an entirely new Cold War by that time as well, one whose boundaries reached well beyond Europe. The emergence of Mao's regime in China, the Sino—Soviet alliance, Soviet and Chinese support for North Korean adventurism, the intervention of US and UN forces in Korea, the subsequent entry of Chinese troops, the presence of communist elements within Southeast Asia's nationalist movements – all ensured that the Cold War would remain a commanding presence in postwar Asia for a long time to come.The Korean War itself dragged on inconclusively until July 1953, when the warring parties signed an armistice that achieved little more than an exchange of prisoners—of—war and a return to the status quo ante bellum. The 38th parallel remained an ominous line of division – not just between North and South Korea, but between the Eastern and Western blocs. With the Korean conflict, the Cold War became increasingly global in scope. In the decade that followed the onset of the Korean fighting, few corners of the world managed to escape the ensnaring web of superpower rivalry, competition, and conflict.Indeed, the principal international flashpoints of the 1950s and 1960s – Iran, Guatemala, Indo—China, the Taiwan Strait, Suez, Lebanon, Indonesia, Cuba, the Congo – lay well beyond the Cold War's original boundaries. Only Berlin, whose contested status triggered Soviet–American crises in 1958 and again in 1961–2, belongs to the set of immediate post—World War II disputes that precipitated the East–West breach in the first place. From the standpoint of the great power struggle, the grounds for defending South Korea were strong.It was believed that if the North Korean aggression succeeded, Indo-China would be almost certain to fall under Communist control, with the aid of whatever Chinese forces were necessary. The snowballing effect of Communist triumphs might make Thailand and Burma relatively easy conquests. Since Indo-China is strategically the key to all South East Asia, the stubborn communist guerrilla movement in Malaya might be expected to gain momentum, with aid from the north, and gun-running to the Huks in the Philippines would not be too difficult.Both in the Philippines and Japan, also, the psychology of Red success would operate powerfully. In the end it might be difficult to hold Japan, especially since she cannot exist, apart from American doles, in the absence of trade with China and South East Asia. As in every crisis of the Cold War, the image of the falling dominoes was allow ed free rein. Thus far the Truman Doctrine had been enforced in Europe, but it had been a dismal failure in East Asia. If now the tremendous triumph of communism in China were capped by further Red gains in Asia the effect on Europe might be decisive.In the United States, too, the result might well be decisive politically for the Truman Administration. Its foes were already making capital bitterly about the non-enforcement of the Doctrine in China. If it collapsed in Asia there would be a mighty outcry indeed. A stage in the Cold War had come which seemed to compel a defense of the Doctrine in Asia. These considerations were sufficient to induce resolute action in Korea, without going to the defense of the United Nations. Up to this time enforcement of the United Nations Charter had not been a compelling motive in Washington.The UN was brushed aside in Greece, and independent action taken to defeat the Communist guerrillas. In Indonesia the United States had brought strong moral pre ssure to bear on the Netherlands in the Security Council, but no troops and planes were sent to fight the Dutch when they defied a UN cease fire order. Nor did the United States mobilize the UN to save the infant Israeli Republic when five Arab states invaded Palestine in 1948 to overturn by force the partition plan adopted by the UN General Assembly.Defiance of the United Nations could not have been more flagrant, but the United States moved no troops and planes to save the victims of Hitler's hate who had gathered in Israel, and who appeared to be on the point of being destroyed by the armies of UN members converging on them from all sides. In the end Israel was saved by her own heroic fighting, with arms obtained largely from communist Czechoslovakia. The United States gave no armed support to Israel as the ward of UN. The Koreans did not ask for the division of their country, even temporarily.They also organized a government which was broadly representative and quite capable of governing the country. But neither the U. S. S. R. nor the U. S. A. would permit this government to function. Each insisted on creating a government for half the country in its own image. In this attempt the Soviets succeeded, but the United States brought a twenty-year emigre back to Korea and permitted him to build himself up into a lifetime despot capable of inviting the American people in their own capital to join him in self destruction.Division having resulted and hardened, two successive attempts to unite Korea by force were made, but the outcome was a great power war which nearly destroyed Korea and did not significantly alter the division of the country. On the contrary, the division was hardened and South Korea was left an overpopulated, undernourished, unviable country, existing only on the military dole of the United States and under a police state government which was a standing invitation to revolution – Red or otherwise.To highlight the argument, it is necessar y to review the years 1945 through 1948. There can be no more striking reflection of Korea's dependence on others than the decision to divide the peninsula into occupation zones in 1945. Koreans had no input in the decision because they had no recognized government or armed forces to defend their interests. They had been swallowed up in the Japanese empire early in the century and were now being freed from that status because of Japan's defeat in a war in which Koreans had contributed more to the losing than to the winning side.Prospects for the peaceful unification of Korea from August 1945 onward were between slim and nil. The first step toward June 25, 1950, had been taken by the great powers—alone. Koreans in 1945 were deeply split among themselves—between close collaborators with the Japanese and underground dissenters; between landowners and peasants; between businessmen and factory workers; between police and civilians. These divisions had festered beneath the s urface before 1945, as the Japanese used the strategy of divide and conquer to ease the task of ruling Korea.The collaborationist issue aside, many of the disputes were foreshadowed in the divisions among exiled independence groups. After liberation from Japan they burst into the open on the peninsula itself. Their existence eliminated any chance for a united indigenous resistance to the country's partition by outsiders. Yet the particular form the divisions took and the ultimate outcome of the resulting conflicts were deeply influenced, indeed often determined, by the foreign presence.That the exiled groups during the Japanese period had looked to outsiders for assistance—Nationalist China and the United States in the case of the Right, the Soviet Union and Communist China in the case of the Left—and that one of the outsiders on each side now occupied half of Korea greatly magnified the problem. The trusteeship issue represented an extreme case, since it was totally c reated by the outsiders. Although the Soviets were able to keep the Korean Left in line on trusteeship, the Americans never persuaded the indigenous Right to support it—or even to exercise restraint in attacking it.Ultimately the United States gave in to Syngman Rhee and abandoned trusteeship, but only because, by September 1947, he represented the best hope for keeping South Korea out of Communist hands, an important U. S. objective in its own right. By the end of 1948, two indigenous governments existed on the peninsula, one exercising authority above the thirty-eighth parallel, one below it, one leftist in orientation and aligned with the Soviet Union, the other rightist and aligned with the United States.It is impossible to imagine this result without the Soviet-American agreement of 1945. If the situation in Korea at the end of 1948 cannot be grasped without reference to the foreign presence since 1945, it is also fair to say that the picture is incomplete without mentio n of the civil conflict that had waxed and waned below the thirty-eighth parallel since the fall of 1946. The unrest began in September with strikes and riots by workers in several cities and soon spread to the countryside, where landlords became frequent objects of attack.Hundreds of civilians and police died in the turmoil. The Left lost heavily in the violence, and for the next year, while unrest was widespread at the village level, it appears not to have been as well coordinated as before. The violence picked up greatly during 1948, with the biggest revolt against government authority beginning in April on Cheju Island. By the end of the year, guerrillas operated extensively on the mainland, so much so that the United States decided to postpone withdrawal of the last of its combat troops from the South.Six of South Korea's eight provinces eventually saw substantial guerrilla activity, which peaked in the fall of 1949 and subsided in the spring of 1950 as a result of strong count eraction by ROK forces. Violence in the South from late 1946 to mid-1950 brought death to some one hundred thousand Koreans. If the Americans were instrumental in suppressing the activity, the Soviets played an integral role in fostering it.Although the general strike in South Korea of September 1946 appears to have begun at the initiative of the Korean Communist Party below the thirty-eighth parallel, the Soviets soon took an active part, giving advice, which the southern rebels often solicited, encouragement, and considerable financial aid. The Soviets also pushed successfully for the merger of the three leftist parties in the two zones and participated in the training and infiltration of North Korean agents and guerrillas into the South.The unrest in South Korea grew in part out of local conditions, but neither its origins nor its course can be understood without devoting heavy attention to activities originating in the North or to actions heavily influenced by the Soviet and Ame rican presence on the peninsula. The local, national, and international forces blended together in a manner that would have made the actual course of events largely unrecognizable with the elimination of any of the three (Stueck 44). On June 25, 1950 NorthKorea invaded South Korea.The invasion was less important in actual strategic terms than in what it symbolized: a confirmation of the aggressive nature of Soviet communism. President Truman attached this symbolism immediately to the war. In his statement issued on June 27 the president declared: â€Å"The attack upon Korea makes it plain beyond all doubt that communism has passed beyond the use of subversion to conquer independent nations and will now use armed invasion and war† (Lowe 120). In response he ordered the Seventh Fleet to protect Formosa, sought U. S. condemnation of the North's aggression, and eventually committed U. S.military forces under the auspices of the United Nations to fight the Korean War. The cold war had suddenly turned into a hot war. But it was a hot war of a peculiar kind. In fact, it was the new face of war in the postwar world. The Korean War was a proxy war fought in Korea but symbolizing the worldwide struggle between the free world and the communist world. If the North Korean invasion symbolized communists' intentions to dominate the world, the U. S. response symbolized the resolve of the United States to resist Soviet domination. It was a critical moment. Metaphysical symbolism replaced tangible objectives as the focal point of war.Such a transcendental transformation had its roots in the original request of economic aid to Greece and Turkey, but it was to have consequences that would reach to the rice paddies of Vietnam. The anticommunism rhetoric was now pervasive and complete. Politicians and people interpreted the meaning of each of these three sets of events – the Hiss conviction and the other charges of domestic communist activities, the invasion of South Korea by the North, and the Chinese intervention into that war – by the standards of that rhetoric and at the same time used these events as proof that the rhetoric was correct in the first place.It was a classic tautology. Understanding and proving arose simultaneously and led to action. And action confirmed the understanding and proof. The Korean War was the linchpin of these final proofs. John Lewis Gaddis (1983) remarked that the widely shared but erroneous impression that the invasion of South Korea was the first military step in the Soviet Union's plan to conquer the world had three important consequences: (1) the transformation of NATO from â€Å"a traditional mutual defense alliance into a[n] integrated military structure† that led to the appointment of a U.S. supreme commander of NATO and the stationing of U. S. troops in Europe; (2) the rearming of West Germany and the signing of a peace treaty with Japan, thus making alliances with old enemies to fight a new enemy; and (3) the approval of National Security Memorandum No. 68, better known as NSC-68 (32). Perhaps the only issue on which the United States and China had significant common interests concerns the Korean peninsula. Washington and Beijing had a strong interest in preventing North Korean acquisition of nuclear weapons.Not only would a nuclear-armed North Korea make a North-South war far more dangerous, but it might also encourage South Korean and Japanese acquisition of nuclear weapons and cause a nuclear arms race in Northeast Asia. Thus, at times Beijing has applied economic pressure on North Korean rulers, assisting U. S. efforts to compel Pyongyang to curtail its nuclear program. Indeed, Chinese policy toward nuclear proliferation into North Korea was one Chinese policy that consistently drew praise from Washington for having â€Å"concerns similar† to America's and for playing â€Å"an important cooperative role† and providing â€Å"critical cooperation† in U. S.efforts to freeze North Korea's nuclear program. China has also been supportive of U. S. efforts to bring about North Korean participation in the four-party peace talks involving the two Koreas, China, and the United States (Guttmann 59). The United States and China also shared an interest in preventing economic and political instability in North Korea from leading to war between the two Koreas. China has contributed to this common objective of a â€Å"soft† rather than a â€Å"crash landing† of the North Korean government by encouraging Pyongyang to open its economy to foreign trade and investment and by supplying it with subsidized energy resources.As the North Korean economy rapidly deteriorated, Beijing supplied Pyongyang with emergency food and clothing supplies. Since then, Beijing has continued to provide North Korea with food, consumer goods, and energy assistance. But even U. S. -China relations on this relatively cooperative issue had tensions. Whe reas Washington's policy toward North Korea was primarily focused on preventing nuclear proliferation, Beijing's policy attached equal weight to its vital interest in preserving its significant influence in a border state located at the intersection of all of the great powers.Moreover, Beijing had even greater interest than Washington in preventing war on the Korean peninsula, insofar as it would be waged on China's border and could spill over into Chinese territory. U. S. China friction results from Washington's frustration when Chinese caution inhibits Beijing from applying greater pressure on the North Korean leadership. Thus far, U. S. -China common interests in regional stability have prevailed, but should the U. S. -North Korean agreement collapse, U. S. -China tension over North Korea could intensify.The nuclear problem on the Korean peninsula was, in part, a holdover from the Cold War. It stemmed, ultimately, from the division of the country and the threat to the status quo posed by the Communist regime in the north – the same set of circumstances that had led to war in 1950. The same dictator – Kim II-sung-who had launched the attack in 1950 was in power and threatening to acquire nuclear weapons in 1994. The problem of North Korean nuclear weapons produced a political alignment in the region that demonstrated the differences between the Cold War and post-Cold War eras in yet another way.In 1950 the United States and Japan were allied with South Korea against North Korea, the Soviet Union, and the People's Republic of China (Buzo 89). Korea has common borders with both Russia and China. All four powers participated, directly or indirectly, in the Korean War of the 1950s. The Korean War was extension of the conflict in and the Cold War, at least in American eyes. North Korea, China, and later Vietnam were seen in Washington as part of a single Communist bloc, all allies and instruments of Moscow. A scenario suggests that the Soviet Union, North Korea, and Communist China conspired to begin a war in Asia.The North Korean invasion of South Korea was the opening move in a Communist offensive for worldwide domination. However, while it is fairly certain that Premier Mao Tsetung and Stalin were both aware of North Korea's decision to invade, there is less evidence that the nations involved were acting under the aegis of international communism. In fact, failure to understand the difference between national and international communism is a significant part of the inability of the United Nations to comprehend the depth of the problem it faced.The actual element of conspiracy, it there was one, may have been in the willingness of major political powers to use small and vulnerable nations in the Cold War. That is, the Korean War simply have been a convenient battleground for one more clash between nations who did not have the courage to take on each other openly. Works Cited Anthony, Farrar-Hockley. â€Å"The China Factor i n the Korean War†. In The Korean War in History ed. James Cotton and Ian Neary. Atlantic Highlands, NJ: Humanities Press, 1989. Ball, S. J. The Cold War: An International History, 1947-1991. Arnold: London, 1998.Buzo, Adrian. The Making of Modern Korea. Routledge: New York. , 2002. Gaddis John Lewis. â€Å"The Emerging Post-Revisionist Synthesis on the Origins of the Cold War†. Diplomatic History 7 (Summer 1983): 171-90. Guttmann, Allen. Korea and the Theory of Limited War. D. C. Heath: Lexington, MA, 1967. Kaufman, Burton I. The Korean Conflict. Greenwood Press: Westport, CT, 1999. Lowe, Peter. The Origins of the Korean War. London: Longmann, 1986. Malkasian, Carter. A History of Modern Wars of Attrition. Praeger: Westport, CT, 2002. Mcmahon, Robert. The Cold War: A Very Short Introduction.Oxford University Press: Oxford, England, 2003. Paige, Glenn D. The Korean Decision. New York: Free Press, 1968. Ridgway, M. B. The Korean War, Garden City, NY, 1967. Roe, Patrick C. The Dragon Strikes: China and the Korean War, June-December 1950. Presidio Press: Novato, CA, 2000. Sandler, Stanley. The Korean War: No Victors, No Vanquished. UCL Press: London, 1999. Stueck, William. Rethinking the Korean War: A New Diplomatic and Strategic History. Princeton University Press: Princeton, NJ, 2002. Wainstock, Dennis D. Truman, Macarthur and the Korean War. Greenwood Press: Westport, CT, 1999.