Abstract

The article compares internal rating systems of three banks from the German-speaking region, continuing with last year's research. In this paper a detailed analysis of qualitative indicators (soft - facts) is made. These qualitative indicators, as one of the two main components of banking rating systems have the wage of between 30% and 50% of the overall rating score. This makes this part of rating certainly important enough to be further researched. The research is focused on the rating of business entities, more precisely the corporate, (especially limited liability companies or joint-stock companies). It does not deal with the rating of natural persons or non-profit organizations, municipalities etc. The procedure of collecting empirical data as well as data from relevant literature, their assessment according to the criteria of verifiability and relevance and the application of the induction method was used and a generalization of conclusions was subsequently made. The goal of this research was to find out if the structure of used qualitative factors (soft- facts) is similar or even the same across the rating systems included in the comparison and what weights of individual factors are used. The result of the research shows that two categories of qualitative indicators (soft - facts) are present in all considered rating systems: (i) quality of company’s management and / or strategy and (ii) market on which the bank client operates. (iii) Accounting or related indicators like information system or audit quality also play a significant role in rating systems. On the other hand, the use of the factor (iv) relationship with the bank (or similar) is quite different across the rating systems included in the research. The number and structure of guidance questions that help risk-management analysts determine indicator values also differ. In one case, there is an extensive catalog of questions with a standardized set of responses. In other cases, the number of questions is lower and each one has its specific variation of the predefined answers the analyst selects from.

Highlights

  • In the last year's and current works (Svítil, 2017a, Svítil, 2017b, Svítil, 2018) the comparison of three internal rating systems compatible with IRB Approach for Basel II was made

  • The result of the research shows that two categories of qualitative indicators are present in all considered rating systems: (i) quality of company’s management and / or strategy and (ii) market on which the bank client operates. (iii) Accounting or related indicators like information system or audit quality play a significant role in rating systems

  • The research conducted by Fracassi, Petry and Tate (2016) examined the influence of the analyst's subjective judgment on the outcome of the rating, and the article deals more with credit rating agencies (CRA) than banks, its outcome is worth mentioning: “We find that significant variation in credit ratings can be explained by differences in the dispositional optimism of the analysts covering the firm. (...) Our results suggest that some firms can face more frictions in raising capital because they are covered by less able credit analysts

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Summary

Introduction

In the last year's and current works (Svítil, 2017a, Svítil, 2017b, Svítil, 2018) the comparison of three internal rating systems compatible with IRB Approach for Basel II was made. Comparable data could be found in just a few works, and in all cases only a single rating system was mentioned. If it was worthwhile (Belás, Cipovová (2011), Kavan (2017) and Radojevic, Suknovic (2008), for details see below), this data were added to the comparison in this paper. The main sources are three 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 mentioned banks use their rating tools to estimate the credit risk of their clients, expressed in the PD (probability of Default)

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