Credit Rating Research Articles

Stress testing social and governance risks: the potential of ESG rating agencies

Recently, there has been a growing focus on sustainability issues within the financial sector. However, quantitative analysis of social and governance aspects has been challenging due to difficulties in data modelling. With the recent regulatory updates for standardised disclosure, the next step could be the implementation of stress tests, given their widespread use in the supervisory environment. The article analyses the possibility of borrowing certain aspects of rating agency methodologies for a future exercise. It identifies common elements that need to be analyzed and highlights areas where institutional intervention will be necessary.

Практика использования ESG-подходов в сделках секьюритизации

The spread of the sustainable development concept has given rise to sustainable finance, as well as the infrastructure of the financial and consulting industry of valuations, verifications and various databases in the field of ESG. This research is devoted to theoretical and practical study of the accumulated experience of ESG securitization transactions in order to systematize ESG financing instruments and directions of development of this sphere in modern conditions. The study showes that ESG securitization practices are being integrated into capital management processes in line with sustainable development goals, with the most developed centers in the USA, Europe and China. The study systematizes the main types of ESG securitized assets, gives their characteristics and identifies current trends. In Russia, despite its isolation from the world financial markets, the practice of ESG securitization is developing, covering new directions. The study notes the potential for the development of green mortgages, which will contribute to the activation of securitization transactions in the segment of residential and commercial real estate. High potential for development of the social segment of ESG securitization is also noted due to the growing demand for financing social projects in the regions. Expansion of the practice of social mortgage securitization will contribute to the redistribution of risks between the public and private sectors, while active involvement of Russian banks in a variety of ESG lending programs (car loans, lending to small and medium-sized businesses with a green and social focus, e.g. for the construction of social infrastructure, etc.) will expand the market. There is a suggestion that the development of digital ESG securitization platforms will help expand the reach of retail investors, while cooling the junk bond market. The article notes that the expansion of multi-tranche ESG securitization will allow long-term assets of pension funds and various ESG funds to be leveraged into mortgage-backed securities. Overall, ESG securitization improves the structure of transactions, expands the range of derivatives used, improves the quality of credit and interest rate risk management, and contributes to the achievement of sustainable development goals.

The Credit Rating Agency Market in Africa: Landscape and Future Research Directions

The Credit Rating Agency Market in Africa: Landscape and Future Research Directions

Corporate Governance and Credit Rating of Islamic Banks: Moderating Role of Shariah Governance Attributes

Shariah governance is the mechanism to monitor and implicate shariah compliance in Islamic banks. The study’s goal of exploring the Islamic bank’s governance attributes and credit scores or rating relationship in the presence of shariah board attributes as moderators. The study collected time-variant data from 22 Asian banks (286 observations) from 2006 to 2018. Applied descriptive statistics, correlations, Likelihood Ratio (LR) test and the Ordered Logistic Regression model, a suitable technique for the ordinal dependent variable. The study findings provide evidence of shariah governance’s moderating role in the relationship between corporate governance attributes and credit rating. Moreover, shariah board characteristics strengthen the association between the corporate board and credit worthiness nexus. This research recommends that credit score evaluating agencies consider the shariah governance characteristics in evaluating Ib’s credit rating. The shariah governance attributes as part of credit rating can be an appropriate method for investors to measure the shariah compliance level of Ibs. Accordingly, Ibs can gain the confidence of investors or sukuk investors by improving shariah compliance and can access competitive fund sources. The study’s uniqueness is in determining the impact of shariah governance attributes as moderators on the board-rating nexus. This study suggested that credit rating agencies revise or amend their assessment procedures for Ibs. Abundant literature is available from the owner’s point of view. Nonetheless, this research explores governance and shariah governance attributes concerning Sukuk holders.

Innovation in Financial Inclusion Policies with Digital Transformation: Evidence from South Korea*

AbstractThis study aims to provide economic insights to enhance the implementation of financial inclusion policies by advancing credit analytics through financial digital transformation. To this end, we examine whether integrating financial analytics innovation with large‐scale financial data can boost the effectiveness of financial inclusion policies and ultimately contribute to better economic outcomes for financially vulnerable individuals. According to our analysis, the government funding program of KRW 200 billion (approximately USD 155 million) can potentially assist an additional 46.56% of financially excluded individuals in South Korea who struggle to obtain loans due to their current credit ratings.

채권내재등급(BIR)의 가치관련성에 관한 연구

[Purpose]This study aims to analyze whether bond implied ratings affect the value relevance of accounting information by conveying information about firms’ future cash flows, or whether optimistic(pessimistic) information is presented to the capital market and biased investor sentiment intervenes in stock price determination using only certain information. [Methodology]We select a sample of 531 firm－year listed on the KOSPI from 2015 to 2020 for which credit ratings and bond implied ratings is available. They are divided into three groups based on the relative grade of credit ratings and bond implied ratings, and a dummy variable identifying these groups is added to the Ohlson(1995) model. [Findings]The results are as follows. First, we find that the difference between credit ratings and bond implied ratings does not in itself convey information about stock price. However, it does lead to differences in the extent to which accounting information provided by firms is reflected in firms stock price. Second, we observe that for groups with implied bond ratings higher than credit ratings(optimistic), EPS is more relevant and BPS is less relevant compared to other groups. We also observe that for the group with implied bond ratings lower than credit ratings(pessimistic) BPS is more relevant that other groups. These results suggest that investor sentiment generated by implied bond ratings disclosure affect the value relevance of accounting information. [Implications]This study is more closely reflective of the actual process in that it considers the direction of credit ratings as opposed to previous study, which defined rating inflation as the situation where the credith ratings is higher that the bond implied rating and considered it as the object of analysis.

Analysis of the performance of financial and economic activities of national oil and gas enterprises (on the example of Uzbekneftegaz JSC)

Currently, in the Republic of Uzbekistan, unlike the economies of a number of border countries, such as Tajikistan, the Kyrgyz Republic, the oil and gas industry, which includes enterprises engaged in the production of hydrocarbons, their processing at various levels, supply and sale to consumers, is one of the leading sectors of the country’s economy. To support the oil and gas industry in organizing the extraction and production of goods with high added value, it is necessary to create long trade and production chains for advanced processing of raw materials, the formation of large production associations that make it possible to benefit from economies of scale in production. In this article, the contribution of the oil and gas complex industry to the country's economy, the areas of activity are considered on the example of the joint-stock company «Uzbekneftgaz», which is the leader in the field. The position of society in the market and the existing risks in financial and economic activity are considered on the basis of SWOT analysis. We conducted a small analysis of the current situation in the oil and gas market, assessed the activities of one of the leading national companies in the region and the indicators of its development. In our opinion, this analysis allows us to see the development and improvement of companies from a development point of view. Keywords: environmental; SWOT analysis; liquidity; investments; net profit; expenses; rating agencies; hydrocarbon reserves.

Corporate Governance and Collateral Effect of Real Estate

The collateral channel literature predicts that soaring real estate prices increase the debt capacity of firms with more real estate asset holdings. This paper discusses the different relationships between collateral and investment. We find that firms with strong corporate governance were more likely to increase debt capacity via the collateral channel during the real estate boom from 1993 to 2006. Entrenched managers used less debt to finance their investments when their real estate collateral values increased. Our results hold even after controlling for non-collateralized debts and credit rating of the sample firms.

Indirect effects of trading restrictions

Stock market trading restrictions affect prices and liquidity directly through constraints on investors' transactions and indirectly by altering the information environment. We isolate this indirect effect by analyzing how stock market restrictions affect corporate bond yields. Exploiting the staggered reductions of trading restrictions in the Chinese stock market as a quasi-natural experiment, we document that the easing of trading restrictions on a firm's stock decreases its corporate bond spreads. This effect is stronger for firms with less transparency or lower credit ratings. Our evidence suggests that the effect is likely due to improved stock price informativeness.

Determinants of Liquidity Risk in Vietnamese Commercial Banks

Liquidity risk, which tends to compound other risks such as credit and market risks, has become one of the principal risks in banks. Thus, this study examined the determinants of liquidity risk measured by the loan deposit ratio (LDR). The sample included 30 commercial banks in Vietnam based on secondary data coverage from 2017-2021. Descriptive statistics were used to determine the general situation of the banks' assets, liabilities, and business performance. The random effects model (REM) was chosen to determine factors affecting liquidity risk. The results show the huge gap in the business performance of the four state-owned banks and the rest of the joint-stock commercial banks, and the state-owned banks always accounted for over 50% of the total credit, assets, and deposits of the whole banking system. The average banks’ credit and profit growth rates were around 17% and 30%, respectively, and the bad debt ratio was about 2%. Increasing a bank’s credit growth rate and profitability would push up its liquidity risk. On the other hand, holding several liquid securities that banks could sell immediately to meet solvency requirements and maintaining a high capital adequacy ratio (CAR) would reduce their liquidity risk. These findings are valuable to the banks in understanding how to minimize liquidity risk, such as controlling the credit growth rate and CAR, setting appropriate profit targets, and investing in liquid securities. Additionally, by conducting monetary policies, the State Bank should regulate market liquidity and bank liquidity for the safe operation of the financial system.

Enterprise risk management (ERM) adoption in developing and developed markets: a comparative study

Purpose This study aims to explore the adoption of enterprise risk management (ERM) in developing and developed countries. Is there a similarity or difference between the two contrasting institutional markets and the reasons behind them? Design/methodology/approach The adoption of ERM is analyzed on the basis of the institutional framework. The author draws empirical evidence by comparing the cases of a British and an Indian insurance company using evidence from multiple sources. This paper focuses on extra-organizational pressures exerted by economic, social and political situations across two countries that influenced the adoption decision of ERM. Findings The findings of this research revealed that early adopters of ERM in different institutional markets face coercive and normative pressure but not mimetic pressure. The adoption of ERM in India and the UK is dissimilar. Companies in the British insurance market encounter higher institutional forces than those in the Indian market because of higher coercive and normative pressure. The aspirations to adopt ERM in the Indian and UK markets included improved strategic decision-making to maintain stakeholder expectations and higher standards of corporate governance. In the UK, ERM was adopted to reduce surprises and fluctuations under flexible regulations but with stricter adoption and to improve credit ratings. Originality/value Previous literature has discussed ERM adoption in similar markets or within one market with similar institutional pressure. In contrast, this research is a comparative study that explains the analysis of institutional theory in two different institutional environments in the adoption of ERM.

The role of international consulting in improving the international investment activity of the IT business

In wartime, the IT industry increases the provision of IT services not only in the domestic market, but also in foreign sales markets due to the increase in the export of IT products. However, there is a problem regarding the financing of foreign projects, so the purpose of the paper is to determine modern sources of financing IT business investment activities in order to enter the international sales markets of IT products and the use of international consulting as an effective management system for the development of foreign economic activities of domestic business entities in the field of IT. Such methods of scientific research as: systematization, comparison and systematic approach for finding sources of financing of international activities in the IT industry are applied; induction and deduction for the justification of preferential taxation and crediting, as well as the use of international consulting services for conducting export operations in the field of IT technologies. The modern conditions of taxation, crediting and financing of business entities are considered, which include: preferential taxation, credit programs for importers of IT products, inclusion of the IT industry in the "5-7-9" lending program, direct investment, use of crowdinvesting operations and fundraising. It is proposed to introduce a group of "small businesses and entrepreneurs" for IT enterprises and IT entrepreneurs as residents of Diya City and to create conditions for their preferential taxation. Measures have been developed to implement a special program for crediting the export of IT products through the export credit agency with the help of long-term bonds, as well as a special fund for crediting the IT business at the expense of deductions from all types of taxes and fees of Diya City residents. For the effectiveness of the proposed investment decisions, it is suggested to use the services of international consulting for the support of foreign economic activity.

Strategic Press Release When Employee Unemployment Risk Is Better Insured

Using the staggered changes in unemployment insurance (UI) benefits across states in the United States as an exogenous shock to employees’ costs of unemployment and the hiring firm’s costs of disclosure, this study investigates whether and how a firm’s relationship with its employees impacts its strategic disclosure through press releases. We find that firms increase (reduce) bad (good) press releases after their employees’ UI benefits become more generous. This finding is consistent with the notion that larger UI benefits reduce the costs of employee unemployment risk borne by hiring firms and thus reduce firms’ costs to release bad news items. Interestingly, we find that the large increase in UI benefits is associated with more discretionary, but not nondiscretionary, bad press releases. The findings are robust when we exclude earnings-related press releases from our sample. Further evidence shows that the increase in negative press releases is mainly driven by news regarding earnings, products-services, marketing, credit ratings, assets, and legal issues, which are more closely related to employee perceptions of unemployment risk. JEL classification: G10; M41; J31; J65.

Common Trends in Introducing Esg-Standards in Russia and Abroad

ESG (Environment, Social, Governance) concept is a code of rules and approaches dealing with doing business that fosters its sustainable development. Today it covers a lot of countries of the world, including Russia. The article studies acute problems of introducing ESG-standards on sustainable development in Russia and overseas countries. At present there are more than 70 standards, however a unique ESG-standard has not been developed yet. Due to the fact countries use existing standards or develop their own ones. The authors show that the development of standards can have different stages: some countries only consider the idea of standards, while others have already been developing them. Russia could reorient to Asian markets, where ESG concept is no less important than in Europe. Agenda of sustainable development is being transformed and the idea of ESG concept is moving from ecological sustainability to social tendency in line with economic adaptation to the current conditions. In Russia the home ESG-trend starts developing, which orientates to home market: own rating agencies, national ESG-scoring, ESG-register, etc. In the future ESG-partnership can be extended to EAEU countries, BRICS and some countries of the Pacific region.

The return of expansionary austerity: Firms' investment response to fiscal adjustments in emerging markets

In emerging markets, unexpected public expenditure reductions increase firm-level investment, which quickly surpasses pre-shock levels after a temporary contraction, owing to a decline in financing costs. Consistent with the role played by financing cost dynamics and financial frictions, we show that countries with lower sovereign credit ratings (those that are not investment grade) experience a sharper boost in investment. In addition, we find that investment's recovery is facilitated by trade openness, public spending predictability, and exchange rate flexibility. In fact, exchange rate flexibility facilitates the real depreciation that result from the fiscal adjustment, which decreases (relative) domestic demand for non-tradable (akin to Diaz-Alejandro, 1966) and increases external demand for tradables, boosting investment. We show that adjustment composition matters: reductions in public consumption (vis-à-vis public investment) yield larger private investment contractions on impact but result in quicker and more sustainable recoveries. Exploiting firm-level heterogeneity we show that investment's expansion is stronger in the tradable-sector, in larger, and in less indebted firms. We provide evidence that the medium-term benefits of fiscal shocks to firm-level activity outweigh their short-run costs.

Моделирование суверенного кредитного риска с учетом экологической эффективности

This study contributes to the evaluation of the role of the eco-efficiency factor in explaining sovereign credit risk. The purpose of the study is to develop a model of sovereign credit risk taking into account the environmental efficiency factor. The sample includes the following countries: Argentina, Belgium, China, China, Egypt, Germany, Greece, Nigeria, Pakistan, Portugal, Spain. 58 % of the world’s countries are categorized as investment grade, indicating that more than half of the countries have high and very high solvency. Using the multiple regression method, the factors affecting the sovereign credit rating are identified: GDP per capita, annual change in inflation, international reserves, private sector credit, total public debt, and environmental performance. The results show a strong positive relationship between credit rating and GDP per capita, private sector lending volume, indicating that countries with better GDP per capita have lower credit risk. To prove the relationship between environmental and credit risk, two multiple regression models were constructed: without and with the environmental factor. The results show that including the environmental factor in modeling a country’s credit rating is appropriate because it improves the quality of the model. According to the two comparison criteria, the model including the environmental factor had better results; the coefficient of determination was larger and the approximation error was smaller. Countries have different environmental situations and different degrees of environmental policy management. There is a relationship between environmental and credit risk of countries, but the environmental situation of a country is not the only determinant factor affecting credit risk. If a country has a high environmental performance index value, it may have an average sovereign rating and vice versa. The scientific usefulness of the study lies in the fact that the constructed model can be used by investors, creditors, rating objects to calculate their own values of sovereign credit ratings.

The demand for loan guarantees in the UK 1981–2018: time series analysis

ABSTRACT Loan guarantee schemes are the primary public policy for addressing credit rationing of smaller firms across the world. In this paper we use four decades of data from the UK scheme to examine how sensitive demand for guaranteed loans is to the two main scheme parameters, the interest rate premium and guarantee coverage rate, as well as the state of the macroeconomy. Using an error correction model, we find that demand is particularly sensitive to the interest rate premium and to a lesser extent the guarantee coverage. In economic crisis periods, demand naturally increases which explains their use in Covid-19.

Determinants of corporate credit ratings: Does ESG matter?

We perform an empirical evaluation of fourteen multinomial classifiers in the prediction of credit ratings on a large dataset consisting of macroeconomic, firm-level financial, and environmental, social, and governance (ESG) variables. Random forests and extremely randomized trees exhibit the highest predictive power for US and global firms. We show that environmental and social responsibility variables are important determinants for the credit ratings, specifically measures of environmental innovation, resource use, emissions, corporate social responsibility, and workforce determinants. The influence of ESG variables become more pronounced following the financial crisis of 2007–2009, and are important across both investment-grade and speculative-grade classes.

Economic uncertainty and credit risk: Evidence from international corporate bonds

Credit spreads are positively associated with economic policy uncertainty. This association is stronger in developing countries and countries with French-origin legal systems and worse sovereign credit ratings. This relation is also stronger for firms that usually face worse credit conditions.

The effect of sovereign credit ratings on democracy in sub-Saharan Africa

PurposeThis study investigates (1) whether democratization drives sovereign credit ratings (SCR) changes (the “democratic advantage”) or whether SCR changes affect democratization, (2) whether the degree of democratization in sub-Saharan African (SSA) countries affects the associations and (3) whether the associations are significantly affected by resource dependence.Design/methodology/approachThis study investigates the effects of SCR changes on democracy in 22 SSA countries over the period of 2000–2020 VEC Granger causality/block exogeneity Wald tests, and impulse responses and variance decomposition analyses with Cholesky ordering and Monte Carlo standard errors in a panel VECM framework.FindingsThe full sample impulse responses find that a SCR shock has a long-run detrimental effect on the democracy and political rights but only a short-run positive impact on civil liberties. Among the sub-samples, it is found that the extent of natural resource dependence does not affect the magnitude of SCR shocks on democratization mentioned above but it is found that a SCR shock affects long-run democracy in SSA countries that are relatively more democratic but is more likely to drive democratic deepening in less democratic SSA countries. The full sample variance decompositions further finds that the variance of SCR to a political rights shock outweighs the effects of all the macroeconomic factors, whereas in more diversified SSA countries, the variances of SCR are much greater for democracy and political rights shocks, which suggests that democratization and political rights in diversified SSA economies are severely affected by SCR changes. In the case of the high and low democracy sub-samples, it is found that the variance of SCR in the relatively higher democracy sub-sample is greater than in the low democracy sub-sample.Social implicationsThese results have three implications for democratization in SSA. First, the effect of a SCR change is not a democratically agnostic and impacts political rights to a greater extent than civil liberties. Second, SCR changes have the potential to spark a negative cycle in SSA countries whereby a downgrade leads to a deterioration in socio-political stability coupled with increased financial economic constraints that in turn drive further downgrades and macroeconomic hardship. Finally, SCR changes are potentially detrimental for democracy in more democratic SSA countries but democratically supportive in less democratic SSA countries. Thus, SSA countries that are relatively politically sophisticated are more exposed to the effects of SCR changes, whereas less politically sophisticated SSA countries can proactively shape their SCRs by undertaking political reforms.Originality/valueThis study is the first to examine the associations between SCR and democracy in SSA. This is critical literature for the Africa’s scholarly work given that the debate on unfair rating actions and claims of subjective rating methods is ongoing.