Information production in credit relationships : on the role of internal ratings in commercial banking

  • This paper discusses the role of internal corporate ratings as a means by which commercial banks condense their informational advantage and preserve it vis-à-vis a competitive lending market. In drawing on a unique data set collected from leading universal banks in Germany, we are able to evaluate the extent to which non-public information determines corporate ratings. As a point of departure, the paper describes a sample of rating systems currently in use, and points at methodological differences between them. Relying on a probit analysis, we are able to show that the set of qualitative, or soft, factors is not simply redundant with respect to publicly available accounting data. Rather, qualitative information tends to be decisive in at least one third of cases. It tends to improve the firms' overall corporate rating. In the case of conflicting rating changes, i.e. when qualitative and quantitative rating changes have opposing signs, quantitative criteria dominate the overall rating change. Furthermore, the more restrictive the weighting scheme as part of the rating methodology is, the stronger is the impact of qualitative information on the firms' overall rating. The implications of our results underline the need to define stringent rating standards, from both a risk management and a regulatory point of view. Revised edition published in: ZEW Wirtschaftsanalysen 2001, Bd 54, Baden-Baden, Nomos

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Author:Antje BrunnerGND, Jan Pieter KrahnenORCiDGND, Martin Weber
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2000,10
Series (Serial Number):CFS working paper series (2000, 10)
Document Type:Working Paper
Year of Completion:2000
Year of first Publication:2000
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2005/06/13
Tag:corporate rating; credit risk management; financial intermediation; information aggregation; long-term lending
GND Keyword:Rating; Wettbewerb; Universalbank; Deutschland
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht