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The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations

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Author Info
François Coppens (National Bank of Belgium, boulevard de Berlaimont 14, BE-1000 Brussels, Belgium.)
Fernando González () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Gerhard Winkler (Oesterreichische Nationalbank, Otto Wagner Platz 3, A-1090 Vienna, Austria.)

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Abstract

The aims of this paper are twofold: first, we attempt to express the threshold of a single “A” rating as issued by major international rating agencies in terms of annualised probabilities of default. We use data from Standard & Poor’s and Moody’s publicly available rating histories to construct confidence intervals for the level of probability of default to be associated with the single “A” rating. The focus on the single “A” rating level is not accidental, as this is the credit quality level at which the Eurosystem considers financial assets to be eligible collateral for its monetary policy operations. The second aim is to review various existing validation models for the probability of default which enable the analyst to check the ability of credit assessment systems to forecast future default events. Within this context the paper proposes a simple mechanism for the comparison of the performance of major rating agencies and that of other credit assessment systems, such as the internal ratings-based systems of commercial banks under the Basel II regime. This is done to provide a simple validation yardstick to help in the monitoring of the performance of the different credit assessment systems participating in the assessment of eligible collateral underlying Eurosystem monetary policy operations. Contrary to the widely used confidence interval approach, our proposal, based on an interpretation of p-values as frequencies, guarantees a convergence to an ex ante fixed probability of default (PD) value. Given the general characteristics of the problem considered, we consider this simple mechanism to also be applicable in other contexts.

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Paper provided by European Central Bank in its series Occasional Paper Series with number 65.

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Length: 40 pages
Date of creation: Jul 2007
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Handle: RePEc:ecb:ecbops:20070065

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  2. Catherine Fuss & Philip Vermeulen, 2006. "The response of firms‘ investment and financing to adverse cash flow shocks - the role of bank relationships," Working Paper Series 658, European Central Bank. [Downloadable!]
  3. Jeanfils, Philippe & Burggraeve, Koen, 2008. ""NONAME": A new quarterly model for Belgium," Economic Modelling, Elsevier, vol. 25(1), pages 118-127, January. [Downloadable!] (restricted)
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  5. Luc Aucremanne & Guy Brys & Mia Hubert & Peter J. Rousseeuw & Anja Struyf, 2002. "Inflation, relative prices and nominal rigidities," Research series 200205-1, National Bank of Belgium. [Downloadable!]
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  6. Joseph Plasmans & Tomasz Michalak & Jorge Fornero, 2006. "Simulation, estimation and welfare implications of monetary policies in a 3-country NOEM model," Research series 200610-6, National Bank of Belgium. [Downloadable!]
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  8. Philip Vermeulen & Daniel Dias & Maarten Dossche & Erwan Gautier & Ignacio Hernando & Roberto Sabbatini & Harald Stahl, 2007. "Price setting in the euro area : some stylised facts from individual producer price data," Research series 200703-30, National Bank of Belgium. [Downloadable!]
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  9. Philippe Jeanfils, 2000. "A model with explicit expectations for Belgium," Research series 200003-3, National Bank of Belgium. [Downloadable!]
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  10. Patrick Bisciari & Alain Durré & Alain Nyssens, 2003. "Stock market valuation in the United States," Documents series 200311, National Bank of Belgium. [Downloadable!]
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  11. Paul Masson, 2000. "Fiscal policy and growth in the context of European integration," Research series 200005-3, National Bank of Belgium. [Downloadable!]
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  12. François Coppens & David Vivet, 2006. "The single European electricity market: A long road to convergence," Documents series 200605-3, National Bank of Belgium. [Downloadable!]
  13. M. Dossche & G. Everaert, 2005. "Measuring inflation persistence: a structural time series approach," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 05/340, Ghent University, Faculty of Economics and Business Administration. [Downloadable!]
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  14. Benoît Eugène & Philippe Jeanfils & Benoît Robert, 2003. "La consommation privée en Belgique," Documents series 200306-2, National Bank of Belgium. [Downloadable!]
  15. Emmanuel Dhyne & Catherine Fuss & Hashem Pesaran & Patrick Sevestre, 2006. "Lumpy price adjustments : a microeconometric analysis," Research series 200610-12, National Bank of Belgium. [Downloadable!]
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  16. Patrick Bisciari, 2001. "Nouvelle économie," Documents series 200104, National Bank of Belgium. [Downloadable!]
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  17. Vivien Lewis, 2006. "Macroeconomic fluctuations and firm entry : theory and evidence," Research series 200610-13, National Bank of Belgium. [Downloadable!]
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  18. Mirabelle Muûls & Mauro Pisu, 2009. "Imports and Exports at the Level of the Firm: Evidence from Belgium," The World Economy, Blackwell Publishing, vol. 32(5), pages 692-734, 05. [Downloadable!] (restricted)
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  19. Catherine Fuss & Philip Vermeulen, 2004. "Firms' investment decisions in response to demand and price uncertainty," Research series 200404-2, National Bank of Belgium. [Downloadable!]
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  20. Konstantijn Maes & Konstantijn Maes, 2003. "Modeling the Term Structure of Interest Rates: Where Do We Stand?," International Economics Working Papers Series wpie008, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics. [Downloadable!]
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  21. Danny Cassimon & Peter-Jan Engelen & Hilde Meersman & Martine Van Wouwe, 2002. "Investment, uncertainty and irreversibility: evidence from belgian accounting data," Research series 200205-4, National Bank of Belgium. [Downloadable!]
  22. Franklin Allen, 2004. "The Efficiency and Stability of Banks and Markets," Research series 200405-8, National Bank of Belgium. [Downloadable!]
  23. Maarten Dossche & Freddy Heylen & Dirk Van den Poel, 2006. "The kinked demand curve and price rigidity : evidence from scanner data," Research series 200610-11, National Bank of Belgium. [Downloadable!]
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  24. Charles Wyplosz, 2000. "Economic growth and the labor markets: Europe's challenge," Research series 200005-4, National Bank of Belgium. [Downloadable!]
  25. Alain Nyssens & Paul Butzen & Patrick Bisciari, 2000. "Performances économiques des Etats-Unis dans les années nonante," Documents series 200003-3, National Bank of Belgium. [Downloadable!]
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  26. Michele Cincera, 2002. "Financing constraints, fixed capital and R&D investment decisions of belgian firms," Research series 200205-13, National Bank of Belgium. [Downloadable!]
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  27. Marcel Gérard & Frédéric Verscueren, 2002. "Finance, uncertainty and investment: assessing the gains and losses of a generalized non linear structural approach using Belgian panel data," Research series 200205-7, National Bank of Belgium. [Downloadable!]
  28. Bekaert, Geert & Harvey, Campbell R. & Lundblad, Christian, 2005. "Does financial liberalization spur growth?," Journal of Financial Economics, Elsevier, vol. 77(1), pages 3-55, July. [Downloadable!] (restricted)
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  29. Natalie Chen & Jean Imbs & Andrew Scott, 2006. "The dynamics of trade and competition," Research series 200610-3, National Bank of Belgium. [Downloadable!]
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  30. Philippe Jeanfils, 2001. "A guided tour of the world of rational expectations models and optimal policies," Research series 2001-06, National Bank of Belgium. [Downloadable!]
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  31. Paul Butzen & Catherine Fuss & Philip Vermeulen, 2002. "The impact of uncertainty on investment plans," Research series 200205-5, National Bank of Belgium. [Downloadable!]
  32. Alain Durré & Pierre Giot, 2005. "An international analysis of earnings, stock prices and bond yields," Working Paper Series 515, European Central Bank. [Downloadable!]
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. François Coppens & Fabienne Verduyn, 2009. "Analysis of business demography using markov chains : an application to Belgian data," Research series 200907-03, National Bank of Belgium. [Downloadable!]
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