Banking Rating Systems for IRB: Comparison of Three Systems from German-speaking Environment

Martin Svítil

doi:10.5817/fai2017-2-5

Abstract

The aim of the article is to compare several rating systems used by banks and their affiliates, especially in German-speaking countries. The research is focused on the rating of business entities, more precisely the corporate ones, (especially limited liability companies or joint-stock companies). In particular, two aspects of the rating of the corporations are highlighted in the rating system comparison, namely: (i) which quantitative indicators are used for the calculation of the hard-facts and (ii) how the soft-facts are included in the rating system. The result of the research shows, that concerning the quantitative indicators (i), the highest emphasis is put on the capital structure of an enterprise (whether in the form of Equity to Liabilities or Equity to Total assets) in all compared rating systems. Concerning the other indicators used for the calculation, the monitored rating systems are different, and the total number of indicators also differs (from 6 to 9). For soft-facts (ii) all rating systems agree on some of the queries (e.g. the sensitivity of the rated entity to market fluctuations), but otherwise the number and the topics of the queries overlap only partially.

Highlights

Internal rating systems are currently an integral part of the risk management system of banks and non-banking financial institutions
As the issue of rating systems is quite extensive, I focus only on selected matters of the rating systems mentioned here, namely: (i) which quantitative indicators are used for the calculation of the hard-facts; and (ii) how the soft-facts are included in the rating system
The criteria and limits for the decision, which module should be used for particular client, are not such simple and differ from bank to bank slightly

Summary

Introduction

Internal rating systems are currently an integral part of the risk management system of banks and non-banking financial institutions. In addition to the original purpose, which is the assessment of clients' creditworthiness, they play an irreplaceable role in determining the capital adequacy of banks in compliance with the Basel II accord and the emerging Basel III accord respectively. This article deals with the comparison of the internal rating systems used currently and / or in the recent past by three banks or banking groups originating from the German-speaking economic environment and regions. All the banks mentioned apply the IRB Approach for Basel II and use their rating tools to assess the credit risk of their clients, expressed in the PD (probability of Default). As the issue of rating systems is quite extensive, I focus only on selected matters of the rating systems mentioned here, namely: (i) which quantitative indicators are used for the calculation of the hard-facts (quantitative analysis based on data from reports, especially balance sheets and profit and loss accounts); and (ii) how the soft-facts are included in the rating system (qualitative indicators usually based on a questionnaire or interview)

Objectives

Results

Conclusion