Credit Rating and Bank-Firm Relationships: New Models to by Michele Modina

By Michele Modina

This booklet explores the position of the ranking approach in creditworthiness overview, taking a look into its present prestige, strengths and weaknesses and attainable evolution within the mild of Basel three and the worldwide monetary trouble.

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Banks that do not meet the criteria for the estimation of PD must set specialized loans to five regulation categories, which are associated with the weightings shown in the following table (system based on regulatory classification criteria). For exposures in equities and Undertakings for Collective Investment in Transferable Securities (UCITS) banks can adopt three different methods: simple risk weight method, PD/LGD approach or internal model method. Different provisions compared to the standard methodology are also planned for the mitigation techniques (Credit Risk Mitigation) and transfer (securitization) credit risk.

Starting from the pioneering study of Altman (1968), several studies have been conducted on the problem of company default prediction modeling. For many years univariate (Beaver, 1966) and multivariate discriminant analysis (Altman 1968; Beaver 1966, 1968; Blum, 1974; Deakin, 1972; Edmister, 1972) have been the leading methods. The univariate model considers the indicators individually when assessing the company’s insolvency trying to perceive its weak points (Varetto, 1999). Beaver (1966) underlined the predictive ability of approximately 30 indicators to provide relevant information that could identify a company’s risk of default.

For a more effective assessment of the credit risk, it is therefore necessary that banks adopt organizational solutions that can enhance the results of the estimation approaches that have been used. , 2012). Banks must respect, within the rating assignment process, the following organizational requirements: replicability and integrity of the process of rating assignment, homogeneity and uniqueness of the evaluation, documentation on the methodology and on the organization of the rating system. The replicability of the assignment process and the possibility to recalculate the rating for each position should be guaranteed.

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