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"The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations." NBB Working Paper No. 118, September 2007

Coppens, François, and González, Fernando, and Winkler, Gerhard. (2007) "The performance of credit rating systems in the assessment of collateral used in Eurosystem monetary policy operations." NBB Working Paper No. 118, September 2007. [Working Paper]

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    Abstract

    The aims of this paper are twofold: first, we attempt to express the threshold of a single “A” rating as issued by major international rating agencies in terms of annualised probabilities of default. We use data from Standard & Poor’s and Moody’s publicly available rating histories to construct confidence intervals for the level of probability of default to be associated with the single “A” rating. The focus on the single A rating level is not accidental, as this is the credit quality level at which the Eurosystem considers financial assets to be eligible collateral for its monetary policy operations. The second aim is to review various existing validation models for the probability of default which enable the analyst to check the ability of credit assessment systems to forecast future default events. Within this context the paper proposes a simple mechanism for the comparison of the performance of major rating agencies and that of other credit assessment systems, such as the internal ratings-based systems of commercial banks under the Basel II regime. This is done to provide a simple validation yardstick to help in the monitoring of the performance of the different credit assessment systems participating in the assessment of eligible collateral underlying Eurosystem monetary policy operations. Contrary to the widely used confidence interval approach, our proposal, based on an interpretation of p-values as frequencies, guarantees a convergence to an ex ante fixed probability of default (PD) value. Given the general characteristics of the problem considered, we consider this simple mechanism to also be applicable in other contexts.

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    Item Type: Working Paper
    Uncontrolled Keywords: Credit risk; credit rating; probability of default (PD); performance checking; backtesting.
    Subjects for non-EU documents: EU policies and themes > Policies & related activities > consumer protection policy
    EU policies and themes > Policies & related activities > economic and financial affairs > monetary policy
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > National Bank of Belgium (Brussels) > Working Papers
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 22 Mar 2008
    Page Range: p. 39
    Last Modified: 15 Feb 2011 17:49
    URI: http://aei.pitt.edu/id/eprint/7612

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