TABLE 8 - uploaded by David Trillo
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Rating agencies have been key players in various financial crisis not just the current one but also in previous episodes such as the Asian crisis. In this paper we address the following issues: (i) the methodological errors in the agencies rating systems regarding corporate and sovereign debt (ii) Basel Committee banking regulation proposal regardi...
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... As shown in Table 2, default frequencies in the highest grades (usually from AAA to BBB, but varying depending on the sample) are systematically equal to zero indicating no defaults were registered in most grades. 12 Regardless of the criteria used to assign obligors to one grade or another, identical default frequencies make it impossible to discriminate among rating grades. The nil default rates are not unusual considering there are relatively few highly rated obligors (above BBB) and, under normal conditions, default is a rare event. ...
... Moody's corporate rating: average default frequencies in investment grade. Source: Vilariño et al.[12] Fitch sovereign rating: default frequencies 1-year horizon(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008). Source: Vilariño et al.[12] ...
... Source: Vilariño et al.[12] Fitch sovereign rating: default frequencies 1-year horizon(1995)(1996)(1997)(1998)(1999)(2000)(2001)(2002)(2003)(2004)(2005)(2006)(2007)(2008). Source: Vilariño et al.[12] ...
The internal ratings-based approach (IRB) to calculating capital requirements for credit risk was the main novelty brought about by Basel II and remains fundamentally unchanged in Basel III. The adequacy of this framework has been controversial since its inception, but throughout the years, most regulators and the banking industry have remained among its strong supporters. This paper focuses on some of the most problematic elements of the IRB approach, concerning the estimation of the main parameters capital requirements depend on and the difficulty embedded in the validation process. In the light of these difficulties, it concludes maintaining the IRB approach in its current form and scope reflects an overly optimistic stance with respect to financial institutions’ ability to accurately estimate critical risk parameters and prospects for future improvements.
