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An integrated multi-model credit rating system for private firms

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  • Giovanni Butera

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  • Robert Faff

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Abstract

This paper presents a integrated credit risk modelling approach for private firms which fulfil 2001 Basel Accord requirements in the case of the adoption of the foundation approach. Our model comprises: (a) a bottom-up technique to initially assess the through-the-cycle one-year Probability of Default (PD) and (b) a top-down approach to refine and calibrate this historical PD in a forward-looking credit risk assessment based on next year’s economic outlook. We present findings from applying this model to a large sample of client firms of the Bank of Rome. Copyright Springer Science + Business Media, LLC 2006

Suggested Citation

  • Giovanni Butera & Robert Faff, 2006. "An integrated multi-model credit rating system for private firms," Review of Quantitative Finance and Accounting, Springer, vol. 27(3), pages 311-340, November.
  • Handle: RePEc:kap:rqfnac:v:27:y:2006:i:3:p:311-340
    DOI: 10.1007/s11156-006-9434-7
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    References listed on IDEAS

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    1. Duffie, Darrell & Lando, David, 2001. "Term Structures of Credit Spreads with Incomplete Accounting Information," Econometrica, Econometric Society, vol. 69(3), pages 633-664, May.
    2. Krahnen, Jan Pieter & Weber, Martin, 2001. "Generally accepted rating principles: A primer," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 3-23, January.
    3. Carey, Mark & Hrycay, Mark, 2001. "Parameterizing credit risk models with rating data," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 197-270, January.
    4. Altman, Edward I. & Bharath, Sreedhar T. & Saunders, Anthony, 2002. "Credit ratings and the BIS capital adequacy reform agenda," Journal of Banking & Finance, Elsevier, vol. 26(5), pages 909-921, May.
    5. Crouhy, Michel & Galai, Dan & Mark, Robert, 2000. "A comparative analysis of current credit risk models," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 59-117, January.
    6. Lando, David & Skodeberg, Torben M., 2002. "Analyzing rating transitions and rating drift with continuous observations," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 423-444, March.
    7. Harald Benink & Clas Wihlborg, 2002. "The New Basel Capital Accord: Making it Effective with Stronger Market Discipline," European Financial Management, European Financial Management Association, vol. 8(1), pages 103-115.
    8. Burgstahler, David & Dichev, Ilia, 1997. "Earnings management to avoid earnings decreases and losses," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 99-126, December.
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    Citations

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    Cited by:

    1. Tsung-Kang Chen & Hsien-Hsing Liao & Chia-Wu Lu, 2011. "A flow-based corporate credit model," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 517-532, May.
    2. Marianna Lyra, 2010. "Heuristic Strategies in Finance – An Overview," Working Papers 045, COMISEF.
    3. Matteo Arena, 2011. "The corporate choice between public debt, bank loans, traditional private debt placements, and 144A debt issues," Review of Quantitative Finance and Accounting, Springer, vol. 36(3), pages 391-416, April.
    4. Cogneau, Philippe & Hübner, Georges, 2015. "The prediction of fund failure through performance diagnostics," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 224-241.
    5. Ana Paula Matias Gama & Helena Susana Amaral Geraldes, 2012. "Credit risk assessment and the impact of the New Basel Capital Accord on small and medium-sized enterprises: An empirical analysis," Management Research Review, Emerald Group Publishing, vol. 35(8), pages 727-749, July.
    6. Bikki Jaggi & Alessandra Allini & Francesca Manes Rossi & Adele Caldarelli, 2016. "Impact of Accounting Traditions, Ownership and Governance Structures on Financial Reporting by Italian Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-29, March.
    7. Jan-Henning Trustorff & Paul Konrad & Jens Leker, 2011. "Credit risk prediction using support vector machines," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 565-581, May.

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