Credit Ratings and Bank Monitoring Ability

L.I. Nakamura, K. Roszbach

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    Abstract

    In this paper we use credit rating data from two Swedish banks to elicit evidence on these banks’ loan monitoring ability. We do so by comparing the ability of bank ratings to predict loan defaults relative to that of public ratings from the Swedish credit bureau. We test the banks’ abilility to forecast the credit bureau’s ratings and vice versa. We show that one of the banks has a superior predictive ability relative to the credit bureau. This is evidence that bank credit ratings do contain valuable private information and suggests they may be be a reasonable basis for risk management. However, public ratings are also found to have predictive ability for future bank ratings, indicating that risk analysis should be based on both public and bank ratings. The methods we use represent a new basket of straightforward techniques that enable both financial institutions and regulators to assess the performance of credit ratings systems.
    Original languageEnglish
    Place of PublicationTilburg
    PublisherVakgroep CentER
    Number of pages47
    Volume2010-37S
    Publication statusPublished - 2010

    Publication series

    NameCentER Discussion Paper
    Volume2010-37S

    Keywords

    • Monitoring
    • banks
    • credit bureau
    • private information
    • ratings
    • regulation
    • supervision

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  • Cite this

    Nakamura, L. I., & Roszbach, K. (2010). Credit Ratings and Bank Monitoring Ability. (CentER Discussion Paper; Vol. 2010-37S). Vakgroep CentER.