The misestimation of rating transition probabilities may lead banks to lend money incoherently with borrowers’ default trajectory, causing both a deterioration in asset quality and higher system distress. Applying a Mover-Stayer model to determine the migration risk of small and medium enterprises, we find that banks are over-estimating their credit risk resulting in excessive regulatory capital. This has important macroeconomic implications due to the fact that holding a large capital buffer is costly for banks and this in turn influences their ability to lend in the wider economy. This conclusion is particularly true during economic downturns with the consequence of exacerbating the cyclicality in risk capital that therefore acts to aggravate economic conditions further. We also explain part of the misevaluation of borrowers and the actual relevant weight of non-performing loans within banking portfolios: prudential prescriptions cannot be considered as effective as expected by regulators who have designed the “new” regulation in response to the most recent crisis. The Mover-Stayers approach helps to reduce calculation inaccuracy when analyzing the historical movements of borrowers’ ratings and, consequently improves the efficacy of the resource allocation process and banking industry stability.

Ferretti, C., Gabbi, G., Ganugi, P., Vozzella, P., Rating trajectories and Credit Risk Migration: Evidence for SME's, <<Quaderno del Dipartimento di Scienze Economiche e Statistiche, Università Cattolica del Sacro Cuore>>, 2016; 2016 (115): 1-31 [http://hdl.handle.net/10807/85645]

Rating trajectories and Credit Risk Migration: Evidence for SME's

Ferretti, Camilla;Ganugi, Piero;
2016

Abstract

The misestimation of rating transition probabilities may lead banks to lend money incoherently with borrowers’ default trajectory, causing both a deterioration in asset quality and higher system distress. Applying a Mover-Stayer model to determine the migration risk of small and medium enterprises, we find that banks are over-estimating their credit risk resulting in excessive regulatory capital. This has important macroeconomic implications due to the fact that holding a large capital buffer is costly for banks and this in turn influences their ability to lend in the wider economy. This conclusion is particularly true during economic downturns with the consequence of exacerbating the cyclicality in risk capital that therefore acts to aggravate economic conditions further. We also explain part of the misevaluation of borrowers and the actual relevant weight of non-performing loans within banking portfolios: prudential prescriptions cannot be considered as effective as expected by regulators who have designed the “new” regulation in response to the most recent crisis. The Mover-Stayers approach helps to reduce calculation inaccuracy when analyzing the historical movements of borrowers’ ratings and, consequently improves the efficacy of the resource allocation process and banking industry stability.
Inglese
Quaderno del Dipartimento di Scienze Economiche e Statistiche, Università Cattolica del Sacro Cuore
978-88-343-3262-7
Vita e Pensiero
Ferretti, C., Gabbi, G., Ganugi, P., Vozzella, P., Rating trajectories and Credit Risk Migration: Evidence for SME's, <<Quaderno del Dipartimento di Scienze Economiche e Statistiche, Università Cattolica del Sacro Cuore>>, 2016; 2016 (115): 1-31 [http://hdl.handle.net/10807/85645]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/10807/85645
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