Credit Ratings
Methodologies, Rationale and Default Risk

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:

 

The 2001 bursting of the New Economy bubble witnessed many defaults by companies that had been rated investment grade immediately prior to default.

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.

The Basle Committee also decided that some banks will be allowed to base capital requirements upon their own internal credit ratings.

An active debate over whether asset value and reduced form default models offer a better indication of corporate health than traditional credit ratings.

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.

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.

The book is divided into six sections:

Rating Credits

Rating Agencies

Credit Scoring Techniques

Regulatory Issues on Credit Ratings

Internal Rating Systems of Banks

Credit Ratings of Asset Securitisations

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

A paper by Edward Altman, inventor of the Altman Z-score, on the state of credit scoring for corporates.

Contents

Rating credits

1. The A to Z of Standard and Poor's Ratings

2. Historical Corporate Rating Migration, Default and Recovery Rates

3. Cyclical Effects in Credit Risk Ratings and Default Risk

Rating agencies

4. An Analysis of the Credit Rating Industry

5. The Meaning of Agency Ratings: A Behavioral Model of Rating Assignment

6. Hybrid Contingent Claims Models: A Practical Approach to Modelling Default Risk

Credit scoring techniques

7. Revisiting Credit Scoring Models in a Basel II Environment

8. Credit Scoring for Corporate Debt

9. Scoring and Validating Techniques for Credit Risk Rating Systems

10. Replicating Agency Ratings through Multinomial Scoring Models

11. Capital Ratios and Credit Ratings as Predictors of Bank Failures

Regulatory issues on credit ratings

12. Regulatory use of Credit Ratings: Implications for Banks, Supervisors and Markets.

13. Regulatory Capital Based on Bank Internal Ratings of Credit Risk

14. Supervisory and Regulatory Concerns Regarding Bank Internal Rating Systems

15. Regulatory Issues on Credit Ratings

Internal rating systems of banks

16. Credit Culture

17. Internal Risk Rating Systems

18. The New Capital Accord and Internal Bank Ratings

19. Designing and Implementing Effective Credit Rating Systems

20. Preparing for the Internal Ratings-Based Approach

21. Some Evidence on the Consistency of Banks' Internal Ratings

Credit Ratings Of asset securitisations

22. Measuring Portfolio Credit Risk with Default Experience Statistic (DES)

23. EL and DP Approaches to Rating CDOs and the Scope for "Ratings Shopping"

24. Rating Based on Credit Portfolio Models

An empirical paper comparing capital ratios and credit ratings as predictors of bank failures.

A fascinating look at the credit ratings industry that explores how SEC regulations have curtailed competition from new ratings agencies in the US.

An insightful article on different credit cultures within banks.

Several papers considering ways to extend traditional credit rating methodologies to pools of obligations.

There is much of value here—enough to increase the human capital of any reader.

For related books, see sections:

Risk Management - Credit Risk

Risk Management - General
 

 

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