Financial Econometrics and Empirical Market Microstructure
The Synergy of Rating Agencies’ Efforts Russian Experience
Alexander Karminsky
Abstract We examine the synergy of the credit rating agencies’ efforts. This question is important not only for regulators, but also for commercial banks if the implementation of the internal ratings and the advanced Basel Approach are discussed. We consider Russian commercial banks as a good example where proposal methods might be used. Firstly, a literature overview was supplemented with an analysis of the activities of rating agencies in Russia. Secondly, we discussed the methods and algorithms of the comparison of rating scales. The optimization task was formulated and the system of rating maps onto the basic scale was obtained. As a result we obtained the possibility of a comparison of different agencies’ ratings. We discussed not only the distance method, but also an econometric approach. The scheme of correspondence for Russian banks is presented and discussed. The third part of the paper presents the results of econometric modeling of the international agencies’ ratings, as well as the probability of default models for Russian banks. The models were obtained from previous papers by the author, but complex discussion and synergy of their systematic exploration were this paper’s achievement. We consider these problems using the example of financial institutions. We discuss the system of models and their implementation for practical applications towards risk management tasks, including those which are based on public information and a remote estimation of ratings. We expect the use of such a systemic approach to risk management in commercial banks as well as in regulatory borders.
Keywords Econometric model • Mapping • Rating • Rating scale • Risk management
JEL Classification G21,G24,G32
The work is partially supported by the International Laboratory of Quantitative Finance, NRU HSE, RF government grant, ag. 14.A12.31.0007.
A. Karminsky (H)
Department of Finance, National Research University Higher School of Economics, IIEPD MGIMO-U, Moscow, Russia e-mail: karminsky@mail. ru
© Springer International Publishing Switzerland 2015
A. K. Bera et al. (eds.), Financial Econometrics and Empirical Market
Microstructure, DOI 10.1007/978-3-319-09946-0_____ 8
Ratings have been an essential tool for risk evaluation for more than a century and their range of use is still growing. Ratings transform a great volume of information into the rating agencies’ opinion on the current financial stability and risk of an entity. They represent the result of a complex assessment of separate companies or single financial instruments (further named as entities). An increasing number of banks, especially those from emerging markets, have become a part of the rating systems in recent years, and the expectation that banks and other entities are going to be rated has become conventional. Rating costs are relatively low for both the issuers and the investors, but the percentage of all banks and companies with ratings is still not large. Moreover, there are no widely accepted instruments to compare rating estimations by different agencies.
Previous research has shown that ratings are important for many reasons, including: regulatory rules, as well as the Basel Accords, asset management and investors for portfolio allocations, government and market regulation covenants for investments and participation at financial tenders and auctions, information for fixed income and equity markets, and so on.
We should also mention that interest in resolving these issues is still increasing. The development of approaches based on internal ratings systems under the Basel
II Accord (Basel 2004) has a practical interest for internal ratings and their models that would help to predict the credit ratings of banks using only freely accessible public information, especially for developing markets. The topic has received increased attention in connection with the global crisis that began in 2007 and the implementation of Basel III (Basel 2010). The regulation of rating agencies’ activities was one of the main topics of the G20 meeting in Moscow in February 2013 (G20 2013).
The key goals of this research are to develop methods of comparison and to compare the bank ratings of the main rating agencies from different points of view. We focus on the synergy of the common use of the ratings of an entity estimated by different agencies, as well as cooperated internal ratings in this integration process. We also consider previous ratings and the probability of default models of different entities to extend the sphere of influence of rating methods for risk management.
For this purpose we executed an analysis of the connected literature, as well as the dynamics of the process of setting ratings to Russian banks (Sect. 2), considering different methods and algorithms for the comparison of ratings (see Sect. 3). Particular attention is devoted to the rating business in Russia and the comparative analysis of ratings of Russian banks that has been rapidly developing and redeveloping in recent years and has involved substantial efforts by the rating agencies.
Later on in Sects. 4 and 5 we discuss the rating model system, which has been obtained in previous papers from the synergy position. We briefly discuss the structure and parameters of the databases, the type of econometric models (order and binary choice), the financial and macroeconomic indicators for the models, and the comparison of the main international ratings connected with Russian financial institutions. Conclusions are provided in last section.
