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The Use of Internal Rating Models in Managing the Risks Related to the Exposures of Non-banking Financial Institutions

Author

Listed:
  • Nicolae Dardac

    (Academy of Economic Studies, Bucharest, Romania)

  • Petronel Chiriac

    (Academy of Economic Studies, Bucharest, Romania)

  • Bogdan Moinescu

    (Academy of Economic Studies, Bucharest, Romania)

Abstract

Although there is no express requirement in the regulations of the National Bank of Romania, the design, the implementation and the use of rating systems in the management of risks related to exposures of non-banking financial institutions (NFIs) on the basis of good banking practice, is a valuable and indispensable in the efficient administration of risks, especially in the current crisis. In this framework, this study describes the synthetic process of reviewing the scoring system used by IFN. The mechanism for evaluation of scoring system performance combines the indicators of discrimination power with econometric results of studying the functional relationship between risk variables integrated in the model and the credit status (default/ reimbursement) based on logit model. The empirical analysis provides clear evidences that while the discriminatory power related to qualitative component (reputational scoring) respects the requirements of a good ex-ante identification of non reimbursement cases, the power of discrimination of quantitative scoring is only marginally superior to a random model. The added value of the study is completed by highlighting the importance of technical conditions of financing facility for anticipating events of non reimbursement. At the same time, the study tries to highlight the importance of scientific calibration of such a scoring system to perform effectively in the early detection of cases of default.

Suggested Citation

  • Nicolae Dardac & Petronel Chiriac & Bogdan Moinescu, 2012. "The Use of Internal Rating Models in Managing the Risks Related to the Exposures of Non-banking Financial Institutions," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 14(31), pages 258-271, February.
    • Handle: RePEc:aes:amfeco:v:14:y:2012:i:31:p:258-271
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    References listed on IDEAS

    as
    1. Nicolae Dardac & Adriana Giba, 2010. "Systemic Crisis Management and Central Bank Independence. An Empirical Analysis," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 12(28), pages 594-605, June.
    2. Gheorghe Oprescu & Daniela Eleodor & Russell Damtoft, 2009. "The Real Economy and Competition Policy in Periods of Retrenchment," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 11(Number Sp), pages 722-734, November.
    3. Nicolae Dardac & Bogdan Moinescu, 2006. "Credit Risk Quantitative Evaluation in the Basel II Perspective," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 5(5(500)), pages 41-46, July.
    4. Lucian-Liviu Albu & Vasile Dinu, 2009. "How Deep and How Long Could Be the Recession in Romania," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 11(Number Sp), pages 675-683, November.
    5. Nicolae DARDAC & Petronel CHIRIAC, 2010. "The Management of Operational Risk Specific to Non-banking Financial Institutions in the Context of Actual Financial Crisis," Theoretical and Applied Economics, Asociatia Generala a Economistilor din Romania / Editura Economica, vol. 4(4(545)), pages 93-100, April.
    6. Alina Mihaela Dima, 2009. "Operational Risk Assesement Tools for Quality Management in Banking Services," The AMFITEATRU ECONOMIC journal, Academy of Economic Studies - Bucharest, Romania, vol. 11(26), pages 364-372, June.
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    More about this item

    Keywords

    non-banking financial institutions; credit risk; scoring model; univariate analysis; multivariate analysis; ROC curve; discriminating power;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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