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Title:Information production in credit relationship: On the role of internal ratings in commercial banking PDF Logo
Authors:Brunner, Antje
Pieter, Jan
Weber, Martin
Issue Date:2000
Series/Report no.:CFS Working Paper 2000/10
Abstract: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.
Subjects:Corporate rating
long-term lending
financial intermediation
information aggregation
credit risk management
JEL:G21
Persistent Identifier of the first edition:urn:nbn:de:hebis:30-9741
Document Type:Working Paper
Appears in Collections:CFS Working Paper Series, Universität Frankfurt a. M.

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