Working Paper: CEPR ID: DP3415
Authors: Jens Grunert; Lars Norden; Martin Weber
Abstract: Internal credit ratings are expected to gain in importance because of their potential use for determining regulatory capital adequacy and banks? increasing focus on the risk-return profile in commercial lending. Therefore, the components of internal credit ratings merit not only a qualitative but also a quantitative analysis. Whereas the eligibility of financial factors as inputs for credit ratings is widely accepted, the role of non-financial factors remains ambiguous. Analysing credit file data from four major German banks we find evidence that the combined use of financial and non-financial factors leads to a more accurate prediction of current and future default events than the single use of each of these factors respectively.
Keywords: credit ratings; credit risk; debt default; probit analysis
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial and nonfinancial factors (G29) | default events (Y60) |
| nonfinancial factors (G29) | predictive accuracy (C52) |
| overall rating (financial + nonfinancial) (G29) | predictive power (C52) |
| financial factors alone (G29) | predictive power (C52) |