Estimating Credit Rating and Transition Matrix of Savings Bank Industry Based upon IRB-Approach

Abstract

This paper proposes a method that estimates credit ratings by mapping empirical probability of default (PD) and standardized historical financial ratios. Unlike standard approaches such as the parametric logit model. discriminant analysis. neural network. and survival function model. the proposed approach has an advantage of offering a multiple credit rating categories. as opposed to either default or not default. of obligors. It would provide an useful information to practitioners because the probability of default for each credit rating category is a critical input under New Basel Capital Accord. Emoirical results based upon the historical PD and financial ratios of Korean savings bank industry from 2000 and 2003 suggest that the industry’s average credit rating belong to a speculative grade. that is BB and below.

In addition, the computed transition matrix indicates that volatility of transition matrix fluctuates substantially each year and the orobability of staying in the same rating category at the end of the year tended to be much smaller than the average reported by the rating agencies for the overall Korean companies. The proposed method can easily be applied to industries other than savings bank industry.

Citation

Kim, M.J., Shin, S.H. and Song, H.S. (2005), "Estimating Credit Rating and Transition Matrix of Savings Bank Industry Based upon IRB-Approach", Journal of Derivatives and Quantitative Studies: 선물연구, Vol. 13 No. 2, pp. 61-85. https://doi.org/10.1108/JDQS-02-2005-B0003