By Michele Modina
This e-book explores the position of the score procedure in creditworthiness evaluation, taking a look into its present prestige, strengths and weaknesses and attainable evolution within the mild of Basel three and the worldwide fiscal problem.
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Extra resources for Credit Rating and Bank-Firm Relationships: New Models to Better Evaluate SMEs
In doing so, the equity capital of the bank tends to better reflect the actual quality of its assets. The adoption of the rating system allows the bank to have an internal evaluation of the borrower’s creditworthiness. Since the rating is the assessment of the ability of a party to fulfill its contractual obligations within a specific time frame based on a set of quantitative and qualitative information, the concept of credit risk goes beyond the traditional dichotomy (ability to honor or not the debt at a given time) in order to set an approach which is able to grasp the deterioration over time of the borrower’s creditworthiness.
The aim of these studies was to measure the probability of default of a company within a certain time horizon. Two methods are employed to achieve this: the univariate model and the multivariate model. Starting from the pioneering study of Altman (1968), several studies have been conducted on the problem of company default prediction modeling. For many years univariate (Beaver, 1966) and multivariate discriminant analysis (Altman 1968; Beaver 1966, 1968; Blum, 1974; Deakin, 1972; Edmister, 1972) have been the leading methods.
Different functions are provided for the various types of exposures. In particular, only one function shall apply to claims on central governments and central banks, supervised institutions and companies; distinct functions are provided for the three subclasses of retail exposures. Specific rules are defined for specialized loans; instead for the equities there are three different methods. The retail counterparts and corporate SMEs enjoy special treatment: the first are provided with more favorable curves compared to other segments and ad hoc treatment for revolving credit (credit cards); instead a benefit is given to the second compared to the treatment received by large companies when they prove to have a turnover of less than 50 million euro.