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Credit Ratings of the Banking Sector

Author

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  • N. Jonker

Abstract

In this paper we analyse the credit rating transitions of banks in Europe, the United States and Japan by using a competing risks model. We have distinguished two types of rating transitions: upgrading and downgrading. We have used some bank characteristics, like country of domicile, type of bank, initial rating, as explanatory variables in our model. We have found that downgrading and upgrading are different types of processes. Downgrading is a memoryless process, whereas upgrading is not. The longer a rating has not changed, the higher the probability that it will be upgraded. Furthermore, the type of bank and country (Japan) matters in the downgrading process but not in the upgrading process. Banks which have a speculative rating show much more volatility in both upgrading and downgrading intensities than banks with an investment rating.

Suggested Citation

  • N. Jonker, 2002. "Credit Ratings of the Banking Sector," WO Research Memoranda (discontinued) 714, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:wormem:714
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    File URL: https://www.dnb.nl/binaries/wo0714_tcm46-146006.pdf
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    References listed on IDEAS

    as
    1. Nickell, Pamela & Perraudin, William & Varotto, Simone, 2000. "Stability of rating transitions," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 203-227, January.
    2. Lee, Lung-Fei, 1983. "Generalized Econometric Models with Selectivity," Econometrica, Econometric Society, vol. 51(2), pages 507-512, March.
    3. Bangia, Anil & Diebold, Francis X. & Kronimus, Andre & Schagen, Christian & Schuermann, Til, 2002. "Ratings migration and the business cycle, with application to credit portfolio stress testing," Journal of Banking & Finance, Elsevier, vol. 26(2-3), pages 445-474, March.
    4. Nickell, Stephen J, 1979. "Estimating the Probability of Leaving Unemployment," Econometrica, Econometric Society, vol. 47(5), pages 1249-1266, September.
    5. 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.
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    Citations

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    Cited by:

    1. José E. Gómez-González & Nicholas M. Kiefer., 2009. "Evidence of Non-Markovian Behavior in the Process of Bank Rating Migrations," Latin American Journal of Economics-formerly Cuadernos de Economía, Instituto de Economía. Pontificia Universidad Católica de Chile., vol. 46(133), pages 33-50.
    2. Gómez-González, José Eduardo & Hinojosa, Inés Paola Orozco, 2010. "Estimation of conditional time-homogeneous credit quality transition matrices," Economic Modelling, Elsevier, vol. 27(1), pages 89-96, January.

    More about this item

    Keywords

    credit ratings; banking; duration models;

    JEL classification:

    • C41 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Duration Analysis; Optimal Timing Strategies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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