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Ratings Versus Market-Based Measures of Default Risk of East Asian Banks

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  • Eric Wong

    (Research Department, Hong Kong Monetary Authority)

  • Cho-Hoi Hui

    (Research Department, Hong Kong Monetary Authority)

  • Chi-fai Lo

    (Institute of Theoretical Physics and Department of Physics, The Chinese University of Hong Kong)

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    Abstract

    This paper assesses whether agency ratings and market-based default risk measures are consistent for East Asian banks during the period 1996 to 2006. While the market-based measures are broadly consistent with the credit rating assessments for banks in developed economies, the discrepancy between ratings and the market-based measures for East Asian banks is significant. Credit ratings for East Asian banks were adjusted slowly during the onset of the Asian financial crisis. The relatively higher default risk implied by ratings during the post-crisis period is partly due to the conservatism of rating agencies and the unsolicited ratings. Discrepancies still exist after taking these two factors into account. From perspective of banking policies, the use of agency-based and market-based measures for calculating capital requirements for exposures to banks and deposit insurance premiums in East Asian economies could result in systematic differences.

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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_12_full.pdf
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    Bibliographic Info

    Paper provided by Hong Kong Monetary Authority in its series Working Papers with number 0712.

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    Length: 30 pages
    Date of creation: Aug 2007
    Date of revision:
    Handle: RePEc:hkg:wpaper:0712

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    Keywords: Asian financial crisis; credit rating agencies; credit risk models;

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