The Role of Non-Financial Factors on Internal Credit Ratings
36 Pages Posted: 6 Aug 2002
Date Written: June 2002
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 risk, credit ratings, debt default, probit analysis
JEL Classification: G21
Suggested Citation: Suggested Citation
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