Credit Rating Research Papers - Academia.edu (original) (raw)

The measurement of credit quality is at the heart of the models designed to assess the reserves and capital needed to support the risks of both individual credits and portfolios of credit instruments. A popular speci…cation for... more

The measurement of credit quality is at the heart of the models designed to assess the reserves and capital needed to support the risks of both individual credits and portfolios of credit instruments. A popular speci…cation for creditrating transitions is the simple, time-homogeneous Markov model. While the Markov speci…cation cannot really describe processes in the long run, it may be useful for adequately describing short-run changes in portfolio risk.

We study the impact credit rating revisions have on stock returns of Australian firms rated by Standard & Poor's and Moody's. Our evidence is consistent with that documented in the USA showing that only downgrades contain pricerelevant... more

We study the impact credit rating revisions have on stock returns of Australian firms rated by Standard & Poor's and Moody's. Our evidence is consistent with that documented in the USA showing that only downgrades contain pricerelevant information. The reaction is most significant when the downgrade: (i) is unanticipated; (ii) is for an unregulated firm; and (iii) reduces the firm's rating by more than one category.

The 1990s have witnessed pronounced boom-bust cycles in emergingmarkets lending, culminating in the Asian financial and currency crisis of 1997-8. By examining the links between sovereign credit ratings and dollar bond yield spreads over... more

The 1990s have witnessed pronounced boom-bust cycles in emergingmarkets lending, culminating in the Asian financial and currency crisis of 1997-8. By examining the links between sovereign credit ratings and dollar bond yield spreads over 1989-97, this paper aims at broad empirical content for judging whether the three leading rating agencies -Moody's, Standard & Poor's and Fitch IBCA -can intensify or attenuate boom-bust cycles in emerging-market lending. First, an event study exploring the market response for 30 trading days before and after rating announcements finds a significant impact of imminent upgrades and implemented downgrades for a combination of ratings by the three leading agencies, despite strong anticipation of rating events. Second, a Granger causality test, by correcting for joint determinants of ratings and yield spreads, finds that changes in sovereign ratings are mutually interdependent with changes in bond yields. These findings are based on many more observations than just the highly publicized crisis episodes in Mexico and Asia. They imply that sovereign ratings have the potential to moderate euphoria among investors on emerging-market bonds, but that the rating agencies have failed to exploit that potential over the past decade.

This paper investigates determinants of pricing of new high yield bond offerings of shipping companies. New high yield bond offerings issued by shipping companies in the US market, during the period 1993–1998, are used in the... more

This paper investigates determinants of pricing of new high yield bond offerings of shipping companies. New high yield bond offerings issued by shipping companies in the US market, during the period 1993–1998, are used in the investigation. The empirical results suggest that credit rating is the major determinant of the price spread of the bond offerings. Financial leverage and shipping market conditions also account for a significant part of the price variability.

Prior research has often taken the view that entrenched managers tend to avoid debt. Contrary to this view, we find that firms with entrenched managers, as measured by the Gompers et al. (2003) governance index, use more debt finance and... more

Prior research has often taken the view that entrenched managers tend to avoid debt. Contrary to this view, we find that firms with entrenched managers, as measured by the Gompers et al. (2003) governance index, use more debt finance and have higher leverage ratios. To address the potential endogeneity of the governance index, we use instrumental variables analysis and the exogenous shock to corporate governance generated by the adoption of state anti-takeover laws. We find that firms incorporated in states that adopt restrictive anti-takeover laws increase the debt component of their external financing. Our evidence is consistent with entrenched managers receiving better access to debt markets (better credit ratings) and better financing terms (perhaps in response to the conservative investment policy that they pursue).

A number of recent papers examine the relationship between default risk and equity returns, and the results are mixed. These studies employ different measures of default risk and we find that correlations between eight diverse measures of... more

A number of recent papers examine the relationship between default risk and equity returns, and the results are mixed. These studies employ different measures of default risk and we find that correlations between eight diverse measures of default risk tend to be less than 50%. Nonetheless, we find that the relationship between stock returns and diverse measures of default risk tends to be consistent; default risk is a significant determinant of stock returns and this relationship is ''hump backed'', as predicted by Garlappi and Yan (2011).

We compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox [1] and find that corporations default as if via diffusive dynamics. The model,... more

We compare observed corporate cumulative default probabilities to those calculated using a stochastic model based on an extension of the work of Black and Cox [1] and find that corporations default as if via diffusive dynamics. The model, based on a contingent-claims analysis of corporate capital structure, is easily calibrated with readily available historical default probabilities and fits observed default data published by Standard and Poor's. Applying this model to the Standard and Poor's default data we find that the difference in default behavior between credit ratings can be explained largely by a single variable: the "distance to default" at the time the rating is given. The ability to represent observed default behavior by a single analytic expression and to differentiate credit-rating-dependent default behavior with a single variable recommends this model for a variety of risk management applications including the mapping of bank default experience to public credit ratings.

Purpose – This study aims to present an empirical model designed to forecast bank credit ratings using only quantitative and publicly available information from their financial statements. For this reason, the authors use the long-term... more

Purpose – This study aims to present an empirical model designed to forecast bank credit ratings using only quantitative and publicly available information from their financial statements. For this reason, the authors use the long-term ratings provided by Fitch in 2012. The sample consists of 92 US banks and publicly available information in annual frequency from their financial statements from 2008 to 2011. Design/methodology/approach – First, in the effort to select the most informative regressors from a long list of financial variables and ratios, the authors use stepwise least squares and select several alternative sets of variables. Then, these sets of variables are used in an ordered probit regression setting to forecast the long-term credit ratings. Findings – Under this scheme, the forecasting accuracy of the best model reaches 83.70 percent when nine explanatory variables are used. Originality/value – The results indicate that bank credit ratings largely rely on historical ...

financial gatekeeper literature to better understand the relationships CRAs have with issuers, investors, and other market participants. The paper makes a conceptual contribution in two ways. First, it contributes by employing interviews... more

financial gatekeeper literature to better understand the relationships CRAs have with issuers, investors, and other market participants. The paper makes a conceptual contribution in two ways. First, it contributes by employing interviews with 14 key credit market participants as illustration, allowing us to get closer to the theoretical constructs . Second, it contributes by extending gatekeeper perspectives from the audit literature to the under-explored ratings industry.

Europe regarding the use of credit rating guidelines in the conduct of their investment activities. We find that ratings-based guidelines are widespread, but their forms and motivations vary considerably. The usage of ratings appears... more

Europe regarding the use of credit rating guidelines in the conduct of their investment activities. We find that ratings-based guidelines are widespread, but their forms and motivations vary considerably. The usage of ratings appears remarkably similar in the US and Europe. The adoption of ratings-based investment guidelines appears driven by the private sector, with regulation playing a relatively minor role. Guidelines generally reference ratings of specific agencies, rather than the ratings of all officially "recognized" agencies. Ratings-based guidelines seem unlikely to destabilize markets because although asset retention guidelines are common, rapid forced selling upon downgrades is not. Market participants express a preference on the margin for more accuracy over more stability, but stability is valued and guidelines rarely include agency outlook designations, which could be used to increase rating accuracy. These findings generally support the hypothesis presented in Cantor that ratings are used as governance tools by market participants to ameliorate principal-agent problems between asset managers and their clients.

This study analyses Regulatory Challenges & Concerns faced by Non-Banking Finance in India and recommends a course of action that can help in a stronger integration of NBFCs with the financial system of India, consequently leading to the... more

This study analyses Regulatory Challenges & Concerns faced by Non-Banking Finance in India and recommends a course of action that can help in a stronger integration of NBFCs with the financial system of India, consequently leading to the development of a long term sustainable economy. The Existing Financial Scenario in India is comprehensively elaborated with emphasis on the role and significance of NBFCs. Need for Addressing the Concerns Regarding NBFCs are stressed upon with regard to Impingement imposed on the banking system due to certain fundamental flaws in the working model of NBFCS. Suggestions are proposed in aspects we find discrepancies like Non-Availability of Refinancing, Lack of Defaulter Database, Lack of Flexibility in NPA Classification Norms, Disparate tax treatment, Leverage Ratio Restrictions, Need to Revise Minimum Credit Rating Parameter, Residual Regulator for Hybrid Issues. Prevailing issues are discussed and necessary reforms are advocated for Streamlining the System and Current Laws with newer rectifications.

The Handbook on Local Governments Self-Assessments represent a radical departure from traditional city planning and financial management practices and aims to promote the following mutually reinforcing objectives: Promote performance... more

The Handbook on Local Governments Self-Assessments represent a radical departure from traditional city planning and financial management practices and aims to promote the following mutually reinforcing objectives: Promote performance measurement. Ensure greater accountability, and support the change process in local public adminis¬tration (accountability). Encourage local governments to get the right data/information and to share it with other municipalities as well as inform cen¬tral government, local associations, and cit¬izens about their current situation and pro¬gram (visibility in the use of public funds). Encourage financial and other relevant municipal departments to work together on capital investment programs anchored in a realistic financial forecast (prioritization). Monitor the financial situation and the investment programs and act on a set of key actions (efficiency and transparency). Use a common set of concepts and internationally accepted indicators so as to improve communications and negotiations with banking institutions, the private sector, and donors (access to external funding). Secure cost-sharing of investment projects. Enhance participation of all interest groups in the choice and selection of municipal/ city programs and projects.

This article presents a modification of ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US... more

This article presents a modification of ruin option pricing model to estimate the implied probability of default from stock and option market prices. To test the model, we analyze all global financial firms with traded options in the US and focus on the subprime mortgage crisis period. We compare the performance of the implied probability of default from our model to the expected default frequencies based on the Moody's KMV model and agency credit ratings by constructing cumulative accuracy profiles (CAP) and the receiver operating characteristic (ROC). We find that the probability of default estimates from our model are equal or superior to other credit risk measures studied based on CAP and ROC. In particular, during the subprime crisis our model surpassed credit ratings and matched or exceeded KMV in anticipating the magnitude of the crisis. We have also found some initial evidence that adding off-balance-sheet derivatives exposure improves the performance of the KMV model.

This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-08 financial turmoil. We focus on two aspects of ratings that contributed to the boom and bust of the market for structured debt: rating... more

This paper examines the role of credit rating agencies in the subprime crisis that triggered the 2007-08 financial turmoil. We focus on two aspects of ratings that contributed to the boom and bust of the market for structured debt: rating inflation and coarse information disclosure. The paper discusses how regulation can be designed to mitigate these problems in the future. Our preferred policy is to require rating agencies to be paid by investors rather than by issuers and to grant open and free access to data about the loans or securities underlying structured debt products. A more modest (but less effective) approach would be to retain the "issuer pays" model but require issuers to pay an upfront fee irrespective of the rating, ban "rating shopping", and prescribe a more complete format for the information that rating agencies must disseminate. JEL Classification: D82, G18, G21

Default probabilities (PDs) and correlations play a crucial role in the New Basel Capital Accord. In commercial credit risk models they are an important constituent. Yet, modeling and estimation of PDs and correlations is still under... more

Default probabilities (PDs) and correlations play a crucial role in the New Basel Capital Accord. In commercial credit risk models they are an important constituent. Yet, modeling and estimation of PDs and correlations is still under active discussion. We show how the Basel II one factor model which is used to calibrate risk weights can be extended to a model for estimating PDs and correlations. The important advantage of this model is that it uses actual information about the point in time of the credit cycle. Thus, uncertainties about the parameters which are needed for Value-at-Risk calculations in portfolio models may be substantially reduced. First empirical evidence for the appropriateness of the models and underlying risk factors is given with S&P data.

The Basel II capital accord encourages financial institutions to develop rating systems for assessing the risk of default of their credit portfolios in order to better calculate the minimum regulatory capital needed to cover unexpected... more

The Basel II capital accord encourages financial institutions to develop rating systems for assessing the risk of default of their credit portfolios in order to better calculate the minimum regulatory capital needed to cover unexpected losses. In the internal ratings based approach, financial institutions are allowed to build their own models based on collected data. In this paper, a generic process model to develop an advanced internal rating system is presented in the context of country risk analysis of developed and developing countries. In the modelling step, a new, gradual approach is suggested to augment the well-known ordinal logistic regression model with a kernel based learning capability, hereby yielding models which are at the same time both accurate and readable. The estimated models are extensively evaluated and validated taking into account several criteria. Furthermore, it is shown how these models can be transformed into user-friendly and easy to understand scorecards. D

The paper expands the Klein-Monti model with bankruptcy risk and deposit insurance. The well-known result of independence between deposit and credit rates is shown to be lost; the causal relationship becomes recursive and the direction of... more

The paper expands the Klein-Monti model with bankruptcy risk and deposit insurance. The well-known result of independence between deposit and credit rates is shown to be lost; the causal relationship becomes recursive and the direction of the recursivity depends on the existence or the absence of a deposit insurance mechanism.

Uluslararası finansal ve ekonomik bütünleşmenin artmasıyla birlikte, ülke kredi notları küresel sermaye akımını yönlendiren en önemli unsurlardan biri haline gelmiş ve kredi derecelendirme kuruluşlarının (KDK) küresel ekonomi ve ülke... more

Uluslararası finansal ve ekonomik bütünleşmenin artmasıyla birlikte, ülke kredi notları küresel sermaye akımını yönlendiren en önemli unsurlardan biri haline gelmiş ve kredi derecelendirme kuruluşlarının (KDK) küresel ekonomi ve ülke ekonomileri üzerindeki etkileri artmıştır. Bununla birlikte, 1990’lı yıllarda yaşanan ekonomik krizlerde ve 2008 yılında başlayan küresel krizde iyi bir sınav veremeyen KDK’lar, giderek artan eleştirilere maruz kalmaktadır.
Kalkınma sürecinin hızlandırılması açısından dış finansman ihtiyacı yüksek bir yapıya sahip olan Türkiye ekonomisi için, KDK’ların ve kredi notu (credit rating) belirleme yöntemlerinin iyi analiz edilmesi önem arz etmektedir. Bu çalışmanın amacı, KDK’ların ülkelere verdikleri kredi notlarının sistematiğini inceleyerek tutarlılığını sorgulamak ve kredi notunun belirleyicilerini tespit ederek ülke kredi notunun artırılabilmesi için politika önerileri sunmaktır. Bu kapsamda, tersine mühendislik yöntemiyle yapılan panel veri analizleri sonucunda; kişi başına düşen milli gelirin, yönetişim kalitesinin, cari işlemler dengesinin, büyüme performansının, büyüme beklentilerinin, sanayileşmiş ülke olmanın ve ülke para biriminin rezerv para olarak kullanılmasının ülke notunu artıran faktörler olduğu görülmüştür. Buna karşın, döviz kuru oynaklığı, faiz ödemeleri, borç yükü seviyesi ve geçmişte temerrüt yaşanmış olması ise ülke kredi notunu düşüren etkenler olarak öne çıkmaktadır.
Çalışmanın sonuçları KDK’lara karşı yapılan krizleri öngörememe ve ani not değişimleriyle mevcut krizleri daha da derinleştirme eleştirilerini desteklemektedir. Analizler Türkiye’nin ülke kredi notunun, özellikle 2004 yılından itibaren, sürekli olarak göstergelerin ima ettiği değerin altında kaldığını, 2012 yılındaki kredi notunun ise BBB (Baa2) düzeyinde olması gerektiğini göstermektedir. Analiz sonuçlarından elde edilen ülke kredi notunun belirleyicileri ve KDK’ların Türkiye ekonomisine yönelttiği eleştiriler göz önüne alındığında, yüksek cari işlemler açığı ve düşük yurtiçi tasarruf oranı kredi notunun artmasının önündeki en belirgin problemler olarak öne çıkmaktadır. Söz konusu problemlerin çözümü için Onuncu Kalkınma Planında yer alan politikaların ve öncelikli dönüşüm programlarının etkin bir şekilde hayata geçirilmesi büyük önem arz etmektedir. Bu kapsamda, Onuncu Kalkınma Planı politikalarının hayata geçirilmesi ve OVP (2015-2017) hedeflerine ulaşılması ve sonraki yıllarda da bu gelişmelerin devam ettirilmesiyle ülkemizin kredi notunun 2020 yılında “BBB+” düzeyine çıkacağı tahmin edilmektedir. Ayrıca, yönetim göstergelerinde yaşanacak daha hızlı bir iyileşme sonucunda ise kredi notunun 2020 yılında “A-” düzeyine kadar çıkabileceği öngörülmektedir.

This Regular Economic Report (RER) covers economic developments, prospects, and policies in six South Eastern European countries (SEE6): Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. The report is... more

This Regular Economic Report (RER) covers economic developments, prospects, and policies in six South Eastern European countries (SEE6): Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. The report is produced twice a year by staff of economists at the World Bank Europe and Central Asia Region Poverty Reduction and Economic Management Department (ECA PREM). The team of authors is led by Gallina Andronova Vincelette, Željko Bogetić, and Abebe Adugna; the following team members have thematic and/or country assignments: Simon Davies (fiscal and debt; and Bosnia and Herzegovina); Agim Demukaj (external sector; and Kosovo); Doerte Doemeland, Nikola Kojucharov, and Ivan Kusen (labor market; monetary policy; inflation developments); Raquel Letelier (financial sector); Anil Onal (database management; and Albania); Lazar Sestović (real sector; and Serbia); Sanja Madzarević-Sujster (Montenegro); Bojan Shimbov (financial sector, FYR Macedonia), Ekaterine Vashakmadze and Mizuho Kida (global developments and outlook); Maria Andreina Clower, Christopher Pala, and Budy Wirasmo provided invaluable assistance in editing and designing this report.

This study sought to establish how various credit risk management practices affect performance of commercial banks in Nyeri County in Kenya. Even though commercial banks face several types of risks, credit risk stands out as the most... more

This study sought to establish how various credit risk management practices affect performance of commercial banks in Nyeri County in Kenya. Even though commercial banks face several types of risks, credit risk stands out as the most severe. Credit risk is the possibility of loss to the lender on non-performing loans. Financial practice as well as theory provides a scientific process of credit risk management in financial institutions. However, lenders still face loan default and consequently this study sought to find out how those practices affect the performance of commercial banks in Nyeri County, Kenya. A census study was conducted where a population of 86 respondents was targeted comprising of branch managers, credit managers and credit officers. The findings of the study were that all commercial banks had a well written credit policy which is strictly and consistently followed. Only few commercial banks conduct a quantitative credit scoring model. In all banks, initial screening is done by credit officer and approval done at different levels depending on the amount. Majority of the banks check post borrowing activities of the borrower. In conclusion, credit risk management has an effect on loan performance amongst commercial banks. Thus, managers should evaluate more accurately the ability to pay back of a customer since the better the screening the better the performance of commercial banks.

Credit risk concentration is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. Concentration risk in credit portfolios comes into being through an uneven... more

Credit risk concentration is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. Concentration risk in credit portfolios comes into being through an uneven distribution of bank loans to individual borrowers (single-name concentration) or in a hierarchical dimension such as in industry and services sectors and geographical regions (sectorial concentration).To measure single-name concentration risk the literature proposes specific concentration indexes such as the Herfindahl–Hirschman index, the Gini index or more general approaches to calculate the appropriate economic capital needed to cover the risk arising from the potential default of large borrowers.However, in our opinion, the Gini index and the Herfindahl–Hirschman index can be improved taking into account methodological and theoretical issues which are explained in this paper.We propose a new index to measure single-name credit concentration risk and we prove the properties of our contribution.Furthermore, considering the guidelines of Basel II, we describe how our index works on real financial data. Finally, we compare our index with the common procedures proposed in the literature on the basis of simulated and real data.

In this current period, human beings are purchasing items from e-commerce sites, and many companies developed an online transaction mode for payment via credit cards. The usage of online credit card transactions is gradually increasing... more

In this current period, human beings are purchasing items from e-commerce sites, and many companies developed an online transaction mode for payment via credit cards. The usage of online credit card transactions is gradually increasing day by day. Generally, online credit card frauds are also happening more. To solve this problem, researchers used some machine learning methods. In this paper, we utilized European credit card fraud dataset for experimental analysis. The further dataset was divided into a training set and test set. The algorithms used in the experiment were Logistic Regression, Random Forest, and CatBoost. Results show that Random Forest and Catboost gives more accuracy and random forest give the best result with evaluation metrics among Logistic regression and Catboost methods.

Basel III seeks to improve the financial sector's resilience to stress scenarios which calls for a reassessment of banks' credit risk models and, particularly, of their dependence on business cycles. This paper advocates a Mixture of... more

Basel III seeks to improve the financial sector's resilience to stress scenarios which calls for a reassessment of banks' credit risk models and, particularly, of their dependence on business cycles. This paper advocates a Mixture of Markov Chains (MMC) model to account for stochastic business cycle effects in credit rating migration risk. The MMC approach is more efficient and provides superior out-of-sample credit rating migration risk predictions at long horizons than a naïve approach that conditions deterministically on the business cycle phase. Banks using the MMC estimator would counter-cyclically increase capital by 6% during economic expansion and free up to 17% capital for lending during downturns relative to the naïve estimator. Thus the MMC estimator is well aligned with the Basel III macroprudential initiative to dampen procyclicality by reducing the recession-versus-expansion gap in capital buffers. JEL classifications: C13; C41; G21; G28.

The paper aims to present duopoly based credit-rating business in Pakistan that comprises on two companies i.e., (a) Pakistan Credit Rating Agency Limited (PACRA) and (b) Japan Credit Rating – Vital Information Services Credit Rating Co.... more

The paper aims to present duopoly based credit-rating business in Pakistan that comprises on two companies i.e., (a) Pakistan Credit Rating Agency Limited (PACRA) and (b) Japan Credit Rating – Vital Information Services Credit Rating Co. Ltd. (JCR-VIS). This research presents comparisons between two credit rating agencies on six operational issues; (a) Services Offered; (b) Pricing Issues; (c) Rating Processes; (d) Rating Scales and (e) Strategic Issues for both companies. It provides valuable insights in understanding the local credit rating industry and selection of a particular agency for credit rating.

Among the most controversial issues in the literature, and empirical studies that have addressed the subject of bankruptcy prediction, there is certainly the understanding of what kind of indicators is most predictive in the report on... more

Among the most controversial issues in the literature, and empirical studies that have addressed the subject of bankruptcy prediction, there is certainly the understanding of what kind of indicators is most predictive in the report on time, and especially with fewer errors thorough a corporate crisis. In this regard, the present work contributes to the already vast literature that analyzes the determinants of the probability of firm default, with particular attention to the quantities contained in the accounting ratios. With the support of 9,390 Italian SMEs will occur the specific contribution of each ratio within each rating category considering, therefore, the predictive value of each explanatory variable. This survey's results can even prove the predictive ability of capital structure and debt coverage compared to the minor validity of some indicators of turnover, profitability, and cash conversion cycle.

This study examines whether the decision to voluntarily (i.e. without a statutory obligation) employ two audit firms to conduct a joint audit is related to audit quality. We use separate samples and empirical designs for public and... more

This study examines whether the decision to voluntarily (i.e. without a statutory obligation) employ two audit firms to conduct a joint audit is related to audit quality. We use separate samples and empirical designs for public and privately held companies in Sweden, where a sufficient number of companies have a joint audit on a voluntary basis. Our empirical findings suggest that companies opting to employ joint audits have a higher degree of earnings conservatism, lower abnormal accruals, better credit ratings and lower perceived risk of becoming insolvent within the next year than other firms. These findings are robust to the use of a propensity score matching technique to control for the differences in client characteristics between firms that employ joint audits and those that use single Big 4 auditors (i.e. auditor self-selection). We also find evidence that the choice of a joint audit is associated with substantial increases in the fees paid by the client firm, suggesting a higher perceived level of quality. Collectively, our analyses support the view that voluntary joint audits are positively associated with audit quality in a relatively low litigious setting both for public and private firms.

n recent years, the demand for sovereign credit ratings-the risk assessments assigned by the credit rating agencies to the obligations of central governments-has increased dramatically. More governments with greater default risk and more... more

n recent years, the demand for sovereign credit ratings-the risk assessments assigned by the credit rating agencies to the obligations of central governments-has increased dramatically. More governments with greater default risk and more companies domiciled in riskier host countries are borrowing in international bond markets. Although foreign government officials generally cooperate with the agencies, rating assignments that are lower than anticipated often prompt issuers to question the consistency and rationale of sovereign ratings. How clear are the criteria underlying sovereign ratings? Moreover, how much of an impact do ratings have on borrowing costs for sovereigns?

Credit rating business is a niche segment in the financial services arena. In the post-reforms era, with increased activity in the Indian Financial sector both existing and new companies are opting for finance from the capital market. The... more

Credit rating business is a niche segment in the financial services arena. In the post-reforms era, with increased activity in the Indian Financial sector both existing and new companies are opting for finance from the capital market. The competition among firms for a slice of the savings cake has increased. Credit rating business in India is a sweet spot as it is on the cusp of robust growth potential, driven by three triggers: Strong capex cycle in Indian economy, lower penetration of corporate bond market and regulatory push due to implementation of Basel II norms. Credit rating helps in the development of financial markets. Credit rating is an investor service and a rating agency is expected to maintain the highest possible level of analytical competence and integrity. The analytical framework of rating deals with evaluation of both the business and financial risks associated with that entity. Besides qualitative aspects like management capabilities also play a considerable role in determining a rating. Credit ratings establish a link between risk & return. They thus provide a yardstick against which to measure the risk inherent in any instrument. Analytical framework of rating deals with evaluation of both the business & financial risks associated with that entity. The Reserve Bank of India liaises with SEBI, on the issue of rating agencies' adherence to IOSCO Code of Conduct Fundamentals.

The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to... more

The intensity of recent turbulence in financial markets has surprised nearly everyone. This paper searches out the root causes of the crisis, distinguishing them from scapegoating explanations that have been used in policy circles to divert attention from the underlying breakdown of incentives. Incentive conflicts explain how securitization went wrong, why credit ratings proved so inaccurate, and why it is

Academic researchers have devoted a considerable amount of attention to the activities of credit rating agencies over the past 20 years, focusing in particular on the agencies' potential role in overseeing corporate financial strength and... more

Academic researchers have devoted a considerable amount of attention to the activities of credit rating agencies over the past 20 years, focusing in particular on the agencies' potential role in overseeing corporate financial strength and promoting the efficient operation of financial markets. Examinations of credit rating practices has recently extended to the insurance industry, where the complex technical nature of market transactions leads to policyholders, investors and others facing particularly acute information asymmetries at the point-of-sale. Published credit ratings are therefore seen as helping to alleviate imperfections in insurance markets by providing a third party opinion on the adequacy of an insurer's financial health and the likelihood of it meeting obligations to policyholders and others in the future. Although the United Kingdom (UK) insurance market is now one of the five largest in the world, relatively little is known about the practices of the major firms and policy-makers which influence its operations. In particular, whilst the determinants of rating agencies' assessments of United States (US) insurers is well documented, published studies have yet to provide comprehensive evidence about insurance company ratings in the UK. This study attempts to fill this gap by examining the ratings awarded by two of the world's leading agencies -A.M. Best and Standard and Poor (S&P) -and establishing the extent to which organizational variables can help predict: (i) insurance firms' decision to be rated; and (ii) the assigned ratings themselves.

Credit Rating Agencies (CRAs) have been a market entity relatively neglected by regulators and commenters, despite the increasing importance they have had in the 20 th century financial markets development. Different legal system as... more

Credit Rating Agencies (CRAs) have been a market entity relatively neglected by regulators and commenters, despite the increasing importance they have had in the 20 th century financial markets development. Different legal system as United States of America and European Union have both recently issued an accurate regulation, that require the agencies the compliance with some organizational and reputational requirements in order to provide rating services. Moreover, almost in the same period Basel II Accord was issued, which attributed at a supernational level a crucial role to CRAs in assessing banks assets. In this article we firstly explain the most important features of the current American and EU regulations, then we examine also the relevant innovations of those new rules that have been proposed in both systems in response of the ongoing financial crisis.

Within any country's capital market, it is essential that there exist a well-developed bond market with a sizeable corporate bond segment alongside the banking system, so that the market mechanism ensures that funds flow in accordance... more

Within any country's capital market, it is essential that there exist a well-developed bond market with a sizeable corporate bond segment alongside the banking system, so that the market mechanism ensures that funds flow in accordance with the productivity of individual investments and the market exerts a competitive pressure on commercial banks' lending to private business and helps improve the efficiency of the entire capital market. Further, the debt market must emerge as a stable source of finance to business when the equity markets are volatile. However, most countries do not have corporate bond markets comparable in efficiency with their equity markets, as the secondary market for corporate debt is mostly Over-the-Counter (and/or telephonic), rather than exchange traded, and it is extensively dominated by a few institutional investors and professional money managers. The market for non-sovereign debt (particularly, the corporate debt segment) in India also has a number of shortcomings: a primary market structure where private placements, sans mandatory credit ratings, dominate in an overwhelming manner, lack of transparent market making, and a tendency on the part of institutional investors to hold securities to maturity. The secondary market is thus prone to suffer from low liquidity and fragmentation and the consequent pricing anomalies.

Unit of the Public Investment Department (PID) of the Ministry of Finance and Economic Planning (MOFEP) and with support from the World Bank and Public Private Infrastructure Advisory Facility (PPIAF). The la er is a multidonor technical... more

Unit of the Public Investment Department (PID) of the Ministry of Finance and Economic Planning (MOFEP) and with support from the World Bank and Public Private Infrastructure Advisory Facility (PPIAF). The la er is a multidonor technical assistance facility aimed at helping developing countries improve the quality of their infrastructure through private sector involvement. The authoring team of Riham Shendy, Zachary Kaplan, and Peter Mousley would like to thank the MOFEP and the PFA Unit for their collaboration and guidance on this study. We would also off er our deep thanks to the Federal Government of Nigeria (FGN), specifi cally the Infrastructure Concession Regulatory Commission (ICRC), and the governments of Kenya, Senegal, Côte d' Ivoire, and Cameroon. Input for this report for the Francophone countries was made possible by the background report completed by Axelcium Consultants and for the Anglophone countries from Benjamin Darche and Thomas Cochran. We extend our thanks to our colleagues at PPIAF who provided the resources for this study. World Bank staff who have also provided guidance and feedback include Clemente

Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission's planned reform of the regulation of insurance companies is well... more

Regulatory authorities pay considerable attention to setting minimum capital levels for different kinds of financial institutions. Solvency II, the European Commission's planned reform of the regulation of insurance companies is well underway. One of its consequences will be a shift in focus to internally based models in determining the regulatory capital needed to cover unexpected losses. This evolution emphasises the importance of credit risk assessment through internal ratings. In light of this new prudential regulation, this paper suggests a Basel II compliant approach to predicting credit ratings for non-rated corporations and evaluates its performance compared to external ratings. The paper provides an interesting modelling of non-financial European companies rated by S&P. In developing the model, broad applicability is set as an important boundary condition. Even though the model developed is fairly simple and maintains a high level of granularity, it gives high rates of accuracy and is very interpretable.

Credit risk concentration is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. Concentration risk in credit portfolios comes into being through an uneven... more

Credit risk concentration is one of the leading topics in modern finance, as the bank regulation has made increasing use of external and internal credit ratings. Concentration risk in credit portfolios comes into being through an uneven distribution of bank loans to individual borrowers (single-name concentration) or in a hierarchical dimension such as in industry and services sectors and geographical regions (sectorial concentration).

Corporate credit rating analysis has attracted lots of research interests in the literature. Recent studies have shown that Artificial Intelligence (AI) methods achieved better performance than traditional statistical methods. This... more

Corporate credit rating analysis has attracted lots of research interests in the literature. Recent studies have shown that Artificial Intelligence (AI) methods achieved better performance than traditional statistical methods. This article introduces a relatively new machine learning technique, support vector machines (SVM), to the problem in attempt to provide a model with better explanatory power. We used backpropagation neural network (BNN) as a benchmark and obtained prediction accuracy around 80% for both BNN and SVM methods for the United States and Taiwan markets. However, only slight improvement of SVM was observed. Another direction of the research is to improve the interpretability of the AI-based models. We applied recent research results in neural network model interpretation and obtained relative importance of the input financial variables from the neural network models. Based on these results, we conducted a market comparative analysis on the differences of determining factors in the United States and Taiwan markets.