Credit Ratings: Methodologies, Rationale and Default Risk

<body stylesrc="../_private/template_title.htm" topmargin="10" leftmargin="10" bgcolor="#FFFFFF" link="#333366" vlink="#000000" alink="#000000"> <div align="left"> <table border="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" cellpadding="0" id="table2"> <tr> <td width="780"> <div align="center"> <table border="0" cellpadding="5" cellspacing="0" height="206" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table3"> <tr> <td align="right" height="198" width="1%"> <p align="left"> <img border="0" src="../images/book_ong_(2002).jpg" width="140" height="200"></td> <td valign="top" align="left" height="198"> <table border="0" cellspacing="1" style="border-collapse: collapse" bordercolor="#111111" cellpadding="0" id="table4"> <tr> <td colspan="3" width="0%"> <p class="book_title">Credit Ratings<br> <font size="3">Methodologies, Rationale and Default Risk</font></td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> <img border="0" src="../images/blank_2x2.gif" width="2" height="2"><img border="0" src="../images/blank_2x2.gif" width="2" height="2"></td> <td width="52%" class="book_details_tags" valign="top" height="144" align="left" rowspan="9"> <map name="FPMap2"> <area href="../main/ratings.htm" shape="rect" coords="74, 0, 162, 33"> </map> <img border="0" src="../images_title/ong_m_55.gif" usemap="#FPMap2" width="163" height="158"></td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" valign="top" height="16" align="left" width="50%"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> <td class="book_details" height="32" align="center" width="50%" rowspan="2"> </td> </tr> <tr> <td width="1%" class="book_details_tags" valign="top" height="16" align="left"> </td> </tr> </table> </td> </tr> </table> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="468" id="table5"> <tr> <td> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </div> <table border="0" cellpadding="5" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table6"> <tr> <td width="50%" valign="top"> <p align="left" class="body"><strong style="font-weight: 400">The once staid field of credit ratings is suddenly the focus of attention—and even controversy. This is due to a confluence of events, including:</strong></p> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="125" align="right" id="table7"> <tr> <td width="5"> </td> <td width="120"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">The 2001 bursting of the New Economy bubble witnessed many defaults by companies that had been rated investment grade immediately prior to default.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">The Basle Committee recently decided to incorporate credit ratings of agencies such as Moody's and Standard & Poor's in certain capital calculations for banks' credit risk.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">The Basle Committee also decided that some banks will be allowed to base capital requirements upon their own internal credit ratings.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">An active debate over whether asset value and reduced form default models offer a better indication of corporate health than traditional credit ratings.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">Explosive growth in the collateralized debt obligation (CDO) market has challenged ratings agencies to devise methodologies for rating pools of obligations in a manner consistent with their ratings of single obligations.</p> <p align="left" class="body"><strong style="font-weight: 400">This edited collection of 24 papers is an excellent vehicle for coming up to speed on the many challenges, conflicts, controversies, debates and opportunities the current environment engenders for anyone who produces, uses, or decries the use of credit ratings.</strong></p> <p align="left" class="body"><strong style="font-weight: 400">The book is divided into six sections:</strong></p> <p align="left" class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10"><strong style="font-weight: 400">Rating Credits</strong></p> <p align="left" class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10"><strong style="font-weight: 400">Rating Agencies</strong></p> <p align="left" class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">Credit Scoring Techniques</p> <p align="left" class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">Regulatory Issues on Credit Ratings</p> <p align="left" class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">Internal Rating Systems of Banks</p> <p align="left" class="bullet_line_space"> <img border="0" src="../images/bullet.gif" width="20" height="10">Credit Ratings of Asset Securitisations</p> <p align="left" class="body">Each section opens with a relevant introduction by Michael Ong. There is no integration between the various papers, but together they provide excellent coverage of topics. Some highlights are </p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">A paper by Edward Altman, inventor of the Altman Z-score, on the state of credit scoring for corporates.</p> </td> <td width="50%" valign="top" class="body" rowspan="2"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table8"> <tr> <td width="100%" bgcolor="#333366"> <p class="header_yellow" align="center">Contents</td> </tr> <tr> <td width="100%" class="explanatory_text"> <table border="1" cellpadding="0" cellspacing="5" style="border-collapse: collapse" bordercolor="#CCCCFF" bgcolor="#CCCCFF" width="100%" id="table9"> <tr> <td class="contents_expanded"> <p class="contents" style="margin-top: 5; margin-bottom: 5"><span style="text-transform: capitalize"><b> Rating credits </b></span></p> <p class="contents" style="margin-top: 5; margin-bottom: 5">1. The A to Z of Standard and Poor's Ratings </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">2. Historical Corporate Rating Migration, Default and Recovery Rates </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">3. Cyclical Effects in Credit Risk Ratings and Default Risk </p> <p class="contents" style="margin-top: 5; margin-bottom: 5"><span style="text-transform: capitalize"><b> Rating agencies </b></span></p> <p class="contents" style="margin-top: 5; margin-bottom: 5">4. An Analysis of the Credit Rating Industry </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">5. The Meaning of Agency Ratings: A Behavioral Model of Rating Assignment </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">6. Hybrid Contingent Claims Models: A Practical Approach to Modelling Default Risk </p> <p class="contents" style="margin-top: 5; margin-bottom: 5"><span style="text-transform: capitalize"><b> Credit scoring techniques </b></span></p> <p class="contents" style="margin-top: 5; margin-bottom: 5">7. Revisiting Credit Scoring Models in a Basel II Environment </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">8. Credit Scoring for Corporate Debt </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">9. Scoring and Validating Techniques for Credit Risk Rating Systems </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">10. Replicating Agency Ratings through Multinomial Scoring Models </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">11. Capital Ratios and Credit Ratings as Predictors of Bank Failures </p> <p class="contents" style="margin-top: 5; margin-bottom: 5"><span style="text-transform: capitalize"><b> Regulatory issues on credit ratings </b></span></p> <p class="contents" style="margin-top: 5; margin-bottom: 5">12. Regulatory use of Credit Ratings: Implications for Banks, Supervisors and Markets. </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">13. Regulatory Capital Based on Bank Internal Ratings of Credit Risk </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">14. Supervisory and Regulatory Concerns Regarding Bank Internal Rating Systems </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">15. Regulatory Issues on Credit Ratings </p> <p class="contents" style="margin-top: 5; margin-bottom: 5"><span style="text-transform: capitalize"><b> Internal rating systems of banks </b></span></p> <p class="contents" style="margin-top: 5; margin-bottom: 5">16. Credit Culture </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">17. Internal Risk Rating Systems </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">18. The New Capital Accord and Internal Bank Ratings </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">19. Designing and Implementing Effective Credit Rating Systems </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">20. Preparing for the Internal Ratings-Based Approach </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">21. Some Evidence on the Consistency of Banks' Internal Ratings </p> <p class="contents" style="margin-top: 5; margin-bottom: 5"><span style="text-transform: capitalize"><b> Credit Ratings Of asset securitisations </b></span></p> <p class="contents" style="margin-top: 5; margin-bottom: 5">22. Measuring Portfolio Credit Risk with Default Experience Statistic (DES) </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">23. EL and DP Approaches to Rating CDOs and the Scope for "Ratings Shopping" </p> <p class="contents" style="margin-top: 5; margin-bottom: 5">24. Rating Based on Credit Portfolio Models </td> </tr> </table> </td> </tr> </table> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">An empirical paper comparing capital ratios and credit ratings as predictors of bank failures.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">A fascinating look at the credit ratings industry that explores how SEC regulations have curtailed competition from new ratings agencies in the US.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">An insightful article on different credit cultures within banks.</p> <p align="left" class="body"> <img border="0" src="../images/bullet.gif" width="20" height="10">Several papers considering ways to extend traditional credit rating methodologies to pools of obligations.</p> <p align="left" class="body">There is much of value here—enough to increase the human capital of any reader.</p> <p align="center" class="body"> </p> </td> </tr> <tr> <td width="50%" valign="bottom"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table10"> <tr> <td width="100%"> <script type="text/javascript"></script> <script type="text/javascript" src="http://pagead2.googlesyndication.com/pagead/show_ads.js"> </script> </td></tr> </table> </td> </tr> </table> <div align="left"> <table border="0" cellpadding="10" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" width="100%" id="table11"> <tr> <td width="50%" bgcolor="#FFFFCC" align="center"> <table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse" bordercolor="#111111" bgcolor="#FFFFCC" id="table12"> <tr> <td> <p class="body" style="margin-bottom: 6"><b><font color="#333366" size="3">For related books, see sections:</font></b></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_credit_institutional.htm">Risk Management - Credit Risk</a></p> <p class="bullet" style="margin-top: 4; margin-bottom: 4"> <img border="0" src="../images/bullet.gif" width="20" height="10"><a target="_top" href="../link_topic/risk_management_general.htm">Risk Management - General</a></td> </tr> </table> </td> </tr> </table> </div> </td> <td>  </td> </tr> </table> </div>  <table border="0" style="border-collapse: collapse" width="100%" cellpadding="0" id="table1" bgcolor="#FFFFFF"> <tr> <td colspan="2" height="12"> <p style="margin-top: 0"> </td> </tr> <tr> <td align="right"> <p align="left" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Ads by Contingency Analysis.</font></a></td> <td align="left"> <p align="right" style="margin-bottom: 2px"> <a target="_top" href="http://www.riskexpertise.com/link/advertising.htm"> <font size="1" color="#000000" face="Arial">Advertise on this site.</font></a></td> </tr> <tr> <td align="center" colspan="2">  <iframe src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=iframe" allowtransparency="true" background-color="transparent" style="margin: 0px; padding: 0px; border-width: 0px" width="300" height="250" frameborder="0" marginwidth="0" marginheight="0" scrolling="no"> <![if lt IE 4]> <script src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=js" type="text/javascript"> </script> <noscript> <a href="http://servedbyadbutler.com/go2/;ID=147917;size=300x250;setID=93136"> <img src="http://servedbyadbutler.com/adserve/;ID=147917;size=300x250;setID=93136;type=img" border="0" height="250" width="300" alt=""></a> </noscript><![endif]> </iframe>   </td> </tr> </table> <p align="center" style="margin-top: 20"> <map name="FPMap0_I1"> <area href="http://www.riskbook.com" shape="rect" coords="0, 0, 184, 29" target="_top"></map> <img border="0" src="../images/open_book_riskbook.gif" usemap="#FPMap0_I1" width="185" height="30"></p> <p class="a" align="center"><font face="Arial" size="2"><a href="../main/disclaimer.htm">disclaimer</a></font></p> <p class="a" align="center"><span class="verdana10">website:</span> <a target="_top" href="http://www.contingencyanalysis.com"> <font size="2" face="Arial">http://www.contingencyanalysis.com</font></a><br> <span class="verdana10">books direct link:</span> <a target="_top" href="http://www.riskbook.com"><font size="2" face="Arial">http://www.riskbook.com</font></a><br> copyright <font face="Times New Roman">©</font> Contingency Analysis, 1996 - current</p> <p class="a" align="center"><map name="FPMap1_I1"> <area target="_top" href="http://www.contingencyanalysis.com" shape="rect" coords="0, 0, 240, 88"> </map><img border="0" src="../images/logo_book_white.gif" usemap="#FPMap1_I1" width="241" height="89"></p>  </body>