Bank Credit Risk Rating Process: Is There a Difference Between Agencies?

Emna Damak

doi:10.5430/ijfr.v12n5p194

Abstract

The purpose of this article is to compare the bank credit risk rating (BCRR) process between credit rating agency (CRA) after the 2012 revision of their methodologies using 76 banks from 23 EMENA countries rated simultaneously by S&P's, Moody's and FitchRatings. We made this comparison based on the CAMELS model with a proposed 'S’ to BCRR. We use “ordered logit” regression for the rating classes and we complete our analysis by “linear multiple” regression for the rating grades. The results show that the BCRR processes are largely consistent between agencies but not aligned. Some differences appear in the important factors and relevant variables of the intrinsic credit quality component that manifest themselves in specific behaviors distinguishing one agency to another. The three agencies agree on the factors: Capital, Earnings, Liquidity and Supports and the most relevant support variable is the sovereign rating of the bank's country of establishment. The results also confirm a consistence between the BCRR's revealed and practiced methodologies revised by the CRA.

Highlights

IntroductionThey urged them to publish several specific documents to answer questions about bank credit risk rating (BCRR)'s methodologies and to undertake after the 2007-09 global crisis, as the IMF reported in the Global Financial Stability Report (2010), a review of the ratings issued as well as updates to their criteria and rating models
The upheaval in the world of finance caused by the events of the crises and bankruptcies of several companies over the last twenty years has not spared the functioning of the credit rating agency (CRA)
The results showed that a consistency exists, to a large extent, between rating processes of the three agencies, but with differences in the importance given to certain factors and the relevance of certain variables of the intrinsic credit quality component

Summary

Introduction

They urged them to publish several specific documents to answer questions about BCRR's methodologies and to undertake after the 2007-09 global crisis, as the IMF reported in the Global Financial Stability Report (2010), a review of the ratings issued as well as updates to their criteria and rating models. The studies of the evolution of BCRR revealed methodologies (Packer & Tarashev, 2011; Damak & Chichti, 2017) based on the specific publications of the three most world-renowned agencies: S&P's, Moody's (M) and FitchRatings (FR) (S&P‟s, 2011b; FitchRatings, 2011a, b; Moody‟s, 2012), clarified those points, among others They have not been fundamentally upset since they are based on the same components (intrinsic credit quality or internal factors, environmental support or external factors), factors (qualitative, quantitative) and information (public, private).

Objectives

Methods

Conclusion