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Quality of Internal Risk Rating Frameworks at Commercial Banks in Pakistan

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  • Ali, Syed Babar

Abstract

The importance of internal risk rating system for an effective credit risk management system can not be overemphasized. The system demands contunuous support and involement of top management of the commercial banks, and the regulators. The attempt to develop robust internal risk rating systems is ongoing among commercial banks. This study was made to measure the quality of internal credit risk rating systems of commercial banks in Pakistan in terms of the various aspects of an internal rating system. To achieve this objective interviews of head of risk management of 10 commercial banks operating in Pakistan were conducted. The unstructured questions used in the interviews were transcribed and the technique of content analysis was used. The findings revealed that internal risk rating systems of commercial banks in Pakistan are generally strong but need improvement in a few aspects. The following areas of internal risk rating systems of commercial banks in Pakistan were found weak: 1. Environment specific to internal risk rating methodologies employed by the banks. 2. Environment specific to the documentation in the internal risk rating system. Other areas such as credit grades, use of qualitative and quantitative factors, methodology, internal risk rating policy, external credit rating, rating definitions, rating criteria, boards involvement were found in lines with the internal risk rating guidelines issued by the SBP. Key Words: Credit Risk, Credit Risk Management, Internal Risk Rating

Suggested Citation

  • Ali, Syed Babar, 2012. "Quality of Internal Risk Rating Frameworks at Commercial Banks in Pakistan," MPRA Paper 55117, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:55117
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    File URL: https://mpra.ub.uni-muenchen.de/55117/1/MPRA_paper_55117.pdf
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    References listed on IDEAS

    as
    1. Simone Varotto, 2008. "An Assessment of the Internal Rating Based Approach in Basel II," ICMA Centre Discussion Papers in Finance icma-dp2008-04, Henley Business School, Reading University.
    2. Kirstein, Roland, 2002. "The new Basle Accord, internal ratings, and the incentives of banks," International Review of Law and Economics, Elsevier, vol. 21(4), pages 393-412, May.
    3. Krahnen, Jan Pieter & Weber, Martin, 2001. "Generally accepted rating principles: A primer," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 3-23, January.
    4. Miguel Angel Segoviano & Philip Lowe, 2002. "Internal ratings, the business cycle, and capital requirements: some evidence from an emerging market economy," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
    5. Philip Lowe & Miguel A. Segoviano, 2002. "Internal ratings, the business cycle and capital requirements: some evidence from an emerging market economy," BIS Working Papers 117, Bank for International Settlements.
    6. Segoviano, Miguel A. & Lowe, Philip, 2002. "Internal ratings, the business cycle and capital requirements: some evidence from an emerging market economy," LSE Research Online Documents on Economics 24948, London School of Economics and Political Science, LSE Library.
    7. Philip Lowe, 2002. "Internal ratings, the business cycle and capital requirements: some evidence from an emerging market economy," FMG Discussion Papers dp428, Financial Markets Group.
    8. Stephanou, Constantinos & Mendoza, Juan Carlos, 2005. "Credit risk measurement under Basel II : an overview and implementation issues for developing countries," Policy Research Working Paper Series 3556, The World Bank.
    9. Bank of Japan, 2005. "Advancing Credit Risk Management through Internal Rating Systems," Bank of Japan Research Papers 2005-07-28, Bank of Japan.
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    More about this item

    Keywords

    Credit Risk; Credit Risk Management; Internal Risk Rating;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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