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

Author

Listed:
  • 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)

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.

Suggested Citation

  • Eric Wong & Cho-Hoi Hui & Chi-fai Lo, 2007. "Ratings Versus Market-Based Measures of Default Risk of East Asian Banks," Working Papers 0712, Hong Kong Monetary Authority.
  • Handle: RePEc:hkg:wpaper:0712
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    File URL: http://www.info.gov.hk/hkma/eng/research/working/pdf/HKMAWP07_12_full.pdf
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    More about this item

    Keywords

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

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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