Bank Credit Risk Management and Rating Migration Analysis on the Business Cycle

Abstract

Abstract:Credit risk measurement remains a critical field of top priority in banking finance, directly implicated in the recent global financial crisis. This paper examines the dynamic linkages between credit risk migration due to rating shifts and prevailing macroeconomic conditions, reflected in alternative business cycle states. An innovative empirical methodology applies to bank internal rating data, under different economic scenarios and investigates the implications of credit risk quality shifts for risk rating transition matrices. The empirical findings are useful and critical for banks to align to Basel guidelines in relation to core capital requirements and risk-weighted assets in the underlying loan portfolio.

Shipping Firms’ Efficiency Evaluation through Stochastic Frontier Analysis

“…The scores from market efficiency evaluation are smaller than the ones obtained from the operating performance panel frontier model. In agreement with the previous researchers, in order to predict the enterprise value of a shipping firm, one may need macro data, shipping cycle data and perhaps credit rating details [9]- [11].…”

The Probability of Default Under IFRS 9: Multi-period Estimation and Macroeconomic Forecast

“…The second popular approach is based on the survival analysis framework. For example Duffie et al (2007) Fei et al (2012) and Gavalas, Syriopoulos (2014) utilize this framework to analyse the relationship between transition probabilities (including default probabilities) and business cycles. Given the main objective of this paper, it is not directly comparable with the mentioned studies.…”

“…Researchers have also investigated and modelled the dependence of transition probabilities on several factors, such as industry, country, and especially macroeconomic variables and the business cycle -see Nickel et al (2000), Bangia et al (2002), Koopman, Lucas (2005), Duffie et al (2007), Figliewski et al (2012), or Gavalas, Syriopoulos (2014). The business cycle (measured with the development of gross domestic product) has proved to be a significant factor influencing transition probabilities, and thus should be taken into account when future transition and default probabilities are estimated.…”

“…As, for example, the latter of the above-mentioned studies indicates, gross domestic product is considered to be a key macroeconomic variable in the context of studying the impact of macroeconomic variables or the business cycle on transition matrices, and hence will be used as a key variable in this paper as well. Gavalas, Syriopoulos (2014) provide a comprehensive list of relevant studies in this area of research. This paper proceeds as follows: The second part of the Introduction describes the IFRS 9 standard and its requirements, the consequences of its adoption, a comparison with the Basel requirements, and the expected impacts on banks.…”

Connecting rating migration matrices and the business cycle by means of generalized regression models

“…, Fei et al . as well as Gavalas and Syriopoulos derive separate migration matrices, which are conditioned on different states of the economy. Nickell et al .…”