Bank Credit Ratings Research Articles

Credit Ratings and Bank Monitoring Ability

In this paper we use credit rating data from two large Swedish banks to elicit evidence on banks? loan monitoring ability. For these banks, our tests reveal that banks? credit ratings indeed include valuable private information from monitoring, as theory suggests. However, our tests also reveal that publicly available information from a credit bureau is not efficiently impounded in the bank ratings: The credit bureau ratings not only predict future movements in the bank ratings but also improve forecasts of bankruptcy and loan default. We investigate possible explanations for these findings. Our results are consistent with bank loan officers placing too much weight on their private information, a form of overconfidence. To the extent that overconfidence results in placing too much weight on private information, risk analyses of the bank loan portfolios in our data could be improved by combining the bank credit ratings and public credit bureau ratings. The methods we use represent a new basket of straightforward techniques that enable both financial institutions and regulators to assess the performance of credit rating systems. ; Supersedes Working Paper 10-21. (This abstract was borrowed from another version of this item.)

Do Solicitations Matter in Bank Credit Ratings? Results from a Study of 72 Countries

Would the credit ratings of unsolicited banks be higher if they were solicited? Alternatively, would the credit ratings of solicited banks would be lower if they were unsolicited? To answer these questions, we use an endogenous regime‐switching model and data from 460 commercial banks in 72 countries, excluding the United States, for the period 1998–2003. The answer to both questions is yes. Our results show that the observed differences between solicited and unsolicited ratings can be explained by both the solicitation status and financial profile of the banks. This finding is a new contribution to the literature.

Is Recovery Risk Priced in Debt Contracts? The Roles of Bank Regulation, Corporate Governance and Credit Rating

Is Recovery Risk Priced in Debt Contracts? The Roles of Bank Regulation, Corporate Governance and Credit Rating

A Cost of Bank Credit Screening and Credit Rationing : Implications for Small Business Finance

A Cost of Bank Credit Screening and Credit Rationing : Implications for Small Business Finance

Modelling Bank Credit Ratings Under Ifrs and Gaap Reporting: an Ordered Probit Approach

In line with Moody's approach to bank credit assessment, we estimate an ordered probit model of bank ratings to examine how those ratings relate to key financial ratios reported by banks and to macroeconomic variables. We find that variables for provisions, profitability, cost efficiency, liquidity, short-term interest rates and bank-size perform well in explaining ratings. But in line with Moody's rating methodology, capital and GDP growth appear not to drive ratings. Under IFRS reporting, profitability and bank-efficiency variables have a larger impact on ratings than under GAAP reporting, but the IFRS-transition has no impact on the information content of provisions.

Bank Credit Rating Dynamics

An increase in the credit rating on the debt of an organisation is generally perceived positively, as higher credit ratings are, in the main, associated with lower perceived volatility in the market value of the assets of the entity that has issued debt. Lower asset volatility implies more stable and sustainable cash flows, and thus a lower likelihood of default on debt, and the result is a lower credit spread on the debt. If banks price their assets to realise a target return on economic capital, then a higher credit rating will result in higher loan rates if the fall in the bank's cost of capital, associated with the lower insolvency risk, is insufficient to offset the additional net income that the loan must be priced to cover. In this paper we develop a loan pricing model that assumes that financial institutions price their assets on a risk- and cost-adjusted basis and with the aim of achieving a minimum required return on the bank's economic capital holding. We compare theoretically derived decreases in the bank's cost of funds to actual data on bank credit spreads in order to ascertain the extent to which the increase in credit rating is beneficial to the bank. We find that the minimum decline in the cost of funds in our model generally exceeds the empirical data, meaning that the reduction in funding costs is insufficient to offset the increase on loan rates associated with higher economic capital. The divergence increases as the proportion of retail funds increases. We further find that the hurdle rate on economic capital is a significant factor in determining the value of a bank increasing its solvency standard. If the hurdle rate remains fixed regardless of the capital structure of the bank, then an upward movement in credit rating may have little impact on the value of the bank given the large divergence between the theoretical decline in the cost of wholesale funds and empirical data on bank credit spreads. However, the divergence is considerably less pronounced if the hurdle rate is varied in direct proportion to the leverage of the bank.

A multicriteria discrimination approach for the credit rating of Asian banks

In this paper we develop a multicriteria decision aid model, to investigate whether it is possible to replicate the credit ratings of Fitch on Asian banks using publicly available data. The model is developed with the Multi-group Hierarchical DIScrimination (MHDIS) approach, following a tenfold cross validation procedure. Five financial variables are selected from a list of nineteen ones through factor analysis. An additional set of five non-financial variables covering ownership, corporate governance, auditing, strength of bank’s franchise and its banking environment is also being used. The results show that equity/customer and short term funding, net interest margin and return on average equity are the most important financial variables. The number of shareholders, the number of subsidiaries and the banking environment of the country in which the banks operate are the most important non-financial ones. In terms of classification accuracies, the results show that the MHDIS model can replicate the credit ratings of Fitch with a satisfactory accuracy and is more efficient than discriminant analysis and ordered logistic regression that are used for comparison purposes.

Expositing stages of VPRS analysis in an expert system: Application with bank credit ratings

The variable precision rough sets model (VPRS) along with many derivatives of rough set theory (RST) necessitates a number of stages towards the final classification of objects. These include, (i) the identification of subsets of condition attributes (@b-reducts in VPRS) which have the same quality of classification as the whole set, (ii) the construction of sets of decision rules associated with the reducts and (iii) the classification of the individual objects by the decision rules. The expert system exposited here offers a decision maker (DM) the opportunity to fully view each of these stages, subsequently empowering an analyst to make choices during the analysis. Its particular innovation is the ability to visually present available @b-reducts, from which the DM can make their selection, a consequence of their own reasons or expectations of the analysis undertaken. The practical analysis considered here is applied on a real world application, the credit ratings of large banks and investment companies in Europe and North America. The snapshots of the expert system presented illustrate the variation in results from the 'asymmetric' consequences of the choice of @b-reducts considered.

Trade Credit and Credit Rationing in Canadian Firms

Burkart and Ellingsen's (2004) model of trade credit and bank credit rationing predicts that trade credit will be used by medium-wealth and low-wealth firms to help ease bank credit rationing.

CREDIT RATING AND BANK BEHAVIOUR IN INDIA: POSSIBLE IMPLICATIONS OF THE NEW BASEL ACCORD

The paper examines the impact of credit rating on capital adequacy ratios of Indian state-owned banks using quarterly data for the period 1997:1 to 2002:4. To this end, a multinomial logit model with multi credit rating indicators as dependent variable is estimated. The variables that can impinge upon capital adequacy ratio have been used as explanatory variables. Two separate models — one for long-term credit rating and another for short-term credit rating — have been estimated. The paper concludes that, both for short-term as well as for long-term ratings, capital adequacy ratios are an important factor impinging on credit rating of Indian state-owned banks.

Bank Credit Commitments, Credit Rationing, and Monetary Policy

When loan needs are uncertain and bankruptcy is costly, contracts resembling bank credit commitments dominate ordinary debt contracts. The fees charged on commitments reduce bankruptcy risk by smoothing out borrowers' loan payments. Reduced bankruptcy risk entitles borrowers to larger loans, thereby reducing the risk of quantity rationing. Even if commitments reduce rationing risk, monetary policy is not necessarily weaker under commitment finance. A rise in lenders' cost of funds, perhaps reflecting a monetary contraction, can reduce the expected value of a project more under a commitment than under an ordinary debt contract. Copyright 1994 by Ohio State University Press.

The Impact of Demand Management Policies on Black Vs. White Employment

This article uses vector autoregression analysis to examine the relative impacts on black and white employment growth of monetary and fiscal actions. It was found that the employment responses to anticipated policy actions, while significant, were generally short-lived, with the exception of the effects of anticipated money growth on white employment. The influences of unanticipated policy changes are of a longer duration. The predominant finding in which black employment growth responded differently from white employment growth was in response to a monetary shock. The black employment response was sharply negative while the white employment response was a gradual increase over nine quarters. The results indicate that this difference occurred only during the 1980s and not in the 1970s and suggests that the effects of bank failures and credit rationing during this period may have significantly hurt minority employment opportunities.

Bank credit rationing and the customer relation

This paper investigates the theory that preference in situations of bank rationing is given to those customers with the strongest customer relation. It has shown that, within a certainty model where competitive pressure among banks requires full compensation for other bank relationships, neither deposit levels nor intertemporal demand would produce the preferential treatment claimed. It has also been shown that the prime borrowers would be unable to bargain effectively for credit line protection from such occasions of credit restriction.