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Credit risk rating at large U.S. banks

Author

Listed:
  • William F. Treacy
  • Mark S. Carey

Abstract

Large banks use internally developed credit rating systems to differentiate the riskiness of their commercial loans. Internal ratings are an essential ingredient of effective credit risk management for such banks, whose commercial borrowers may number in the tens of thousands. This article describes these rating systems, how their design varies across institutions, and how they are used in risk management. The article also outlines conceptual and practical difficulties currently faced by banks in achieving accurate and consistent ratings and describes ways in which some institutions have attempted to deal with these difficulties. This article is based on a detailed review of policy documents and internal management reports from the fifty largest U.S. bank holding companies and interviews by the authors at a selection of these institutions.

Suggested Citation

  • William F. Treacy & Mark S. Carey, 1998. "Credit risk rating at large U.S. banks," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Nov, pages 897-921.
  • Handle: RePEc:fip:fedgrb:y:1998:i:nov:p:897-921:n:v.84no.11
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    File URL: http://www.federalreserve.gov/pubs/bulletin/1998/1198leadw.pdf
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    Cited by:

    1. Krink, Thiemo & Paterlini, Sandra & Resti, Andrea, 2008. "The optimal structure of PD buckets," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2275-2286, October.
    2. Andrew T. Young & Matthew J. Higgins & Donald J. Lacombe & Briana Sell, 2014. "The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data," NBER Working Papers 20543, National Bureau of Economic Research, Inc.
    3. Dewitt D Marston, 2001. "Financial System Standards and Financial Stability; The Case of the Basel Core Principles," IMF Working Papers 01/62, International Monetary Fund.
    4. Florian Heider & Roman Inderst, 2012. "Loan Prospecting," Review of Financial Studies, Society for Financial Studies, vol. 25(8), pages 2381-2415.
    5. Carey, Mark & Hrycay, Mark, 2001. "Parameterizing credit risk models with rating data," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 197-270, January.
    6. Tadanori Yosano & Chitoshi Koga, 2008. "Influence of Intellectual Capital Information on Credit Risk Rating Process/Criterion and Credit Conditions - Survey Analysis to Japanese Financial Institutions," Discussion Papers 2008-52, Kobe University, Graduate School of Business Administration.
    7. Sironi, Andrea, 2003. " Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(3), pages 443-472, June.
    8. Mark S. Carey, 2002. "A guide to choosing absolute bank capital requirements," International Finance Discussion Papers 726, Board of Governors of the Federal Reserve System (U.S.).
    9. Lopez, Jose A. & Saidenberg, Marc R., 2000. "Evaluating credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 151-165, January.
    10. Loretta J. Mester & Leonard I. Nakamura & Micheline Renault, 2004. "Transactions accounts and loan monitoring," Working Papers 04-20, Federal Reserve Bank of Philadelphia.
    11. repec:pal:jorsoc:v:61:y:2010:i:3:d:10.1057_jors.2009.136 is not listed on IDEAS
    12. Ivashina, Victoria, 2009. "Asymmetric information effects on loan spreads," Journal of Financial Economics, Elsevier, vol. 92(2), pages 300-319, May.
    13. Van Laere, Elisabeth & Baesens, Bart, 2010. "The development of a simple and intuitive rating system under Solvency II," Insurance: Mathematics and Economics, Elsevier, vol. 46(3), pages 500-510, June.
    14. Gordy, Michael B., 2003. "A risk-factor model foundation for ratings-based bank capital rules," Journal of Financial Intermediation, Elsevier, vol. 12(3), pages 199-232, July.
    15. Kroot, Jan & Giouvris, Evangelos, 2016. "Dutch mortgages: Impact of the crisis on probability of default," Finance Research Letters, Elsevier, vol. 18(C), pages 205-217.
    16. Michel Dietsch, 2003. "De Bâle II vers Bâle III : les enjeux et les problèmes du nouvel Accord," Revue d'Économie Financière, Programme National Persée, vol. 73(4), pages 325-342.
    17. Sayuri Shirai, 2001. "Searching for New Regulatory Frameworks for the Intermediate Financial Structure in Post-Crisis Asia," Center for Financial Institutions Working Papers 01-28, Wharton School Center for Financial Institutions, University of Pennsylvania.
    18. anonymous, 2000. "Improving public disclosure in banking," Staff Studies 173, Board of Governors of the Federal Reserve System (U.S.).
    19. Kevin T. Jacques & Lakshmi Balasubramanyan, 2011. "Risk Weights in Regulatory Capital Standards: Is It Necessary to 'Get It Right'?," NFI Working Papers 2011-WP-23, Indiana State University, Scott College of Business, Networks Financial Institute.
    20. Carey, Mark, 2002. "A guide to choosing absolute bank capital requirements," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 929-951, May.
    21. Gordy, Michael B. & Howells, Bradley, 2006. "Procyclicality in Basel II: Can we treat the disease without killing the patient?," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 395-417, July.
    22. Treacy, William F. & Carey, Mark, 2000. "Credit risk rating systems at large US banks," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 167-201, January.
    23. Benford, James & Nier, Erlend, 2007. "Financial Stability Paper No 3: Monitoring Cyclicality of Basel II Capital Requirements," Bank of England Financial Stability Papers 3, Bank of England.
    24. Ahn, Sungyoon & Choi, Wooseok, 2009. "The role of bank monitoring in corporate governance: Evidence from borrowers' earnings management behavior," Journal of Banking & Finance, Elsevier, vol. 33(2), pages 425-434, February.
    25. Altman, Edward I. & Rijken, Herbert A., 2004. "How rating agencies achieve rating stability," Journal of Banking & Finance, Elsevier, vol. 28(11), pages 2679-2714, November.

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    Keywords

    Credit ratings ; Risk;

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