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Are Ratings Consistent with Default Probabilities?: Empirical Evidence on Banks in Emerging Market Economies

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  • Christophe J. Godlewski

Abstract

The role of agency ratings as a market-disciplining device, through the production of information on default risk, should grow within Pillar 3 of the Basel II reform. For the role to be efficient, the rating must be effectively consistent with the counterpart's default probability, particularly for emerging markets, where less-developed financial markets, banking-sector accrued opacity, and an inadequate regulatory, institutional, and legal environment affect banks' risk-taking behavior and therefore default risk. This paper uses scoring and mapping methods to study the consistency of bank ratings with their default probabilities in emerging market economies. Results show a correct quantification of agency rating grades, and thus, their consistency. However, mapping results also show that the rating tends to aggregate banks' default risk information into intermediate-low rating grades.

Suggested Citation

  • Christophe J. Godlewski, 2007. "Are Ratings Consistent with Default Probabilities?: Empirical Evidence on Banks in Emerging Market Economies," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 43(4), pages 5-23, August.
    • Handle: RePEc:mes:emfitr:v:43:y:2007:i:4:p:5-23
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    Cited by:

    1. Salvador, Carlos & Pastor, Jose Manuel & Fernández de Guevara, Juan, 2014. "Impact of the subprime crisis on bank ratings: The effect of the hardening of rating policies and worsening of solvency," Journal of Financial Stability, Elsevier, vol. 11(C), pages 13-31.
    2. Alexander M. Karminsky & Ella Khromova, 2018. "Increase of banks’ credit risks forecasting power by the usage of the set of alternative models," Russian Journal of Economics, ARPHA Platform, vol. 4(2), pages 155-174, June.
    3. Peresetsky, A. A., 2011. "What factors drive the Russian banks license withdrawal," MPRA Paper 41507, University Library of Munich, Germany.
    4. Peresetsky, Anatoly, 2013. "Modeling reasons for Russian bank license withdrawal: Unaccounted factors," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 30(2), pages 49-64.

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