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The Role of Non-financial Factors in Internal Credit Ratings

  • Grunert, Jens
  • Norden, Lars
  • Weber, Martin

Internal credit ratings are expected to gain in importance because of their potential use for determining regulatory capital adequacy and banks’ increasing focus on the risk-return profile in commercial lending. Therefore, the components of internal credit ratings merit not only a qualitative but also a quantitative analysis. Whereas the eligibility of financial factors as inputs for credit ratings is widely accepted, the role of non-financial factors remains ambiguous. Analysing credit file data from four major German banks we find evidence that the combined use of financial and non-financial factors leads to a more accurate prediction of current and future default events than the single use of each of these factors respectively.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3415.

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Date of creation: Jun 2002
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Handle: RePEc:cpr:ceprdp:3415
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