Discussion Paper Details

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Title: The Role of Non-financial Factors in Internal Credit Ratings

Author(s): Jens Grunert, Lars Norden and Martin Weber

Publication Date: June 2002

Keyword(s): credit ratings, credit risk, debt default and probit analysis

Programme Area(s): Financial Economics

Abstract: Internal credit ratings are expected to gain in importance because of their potential use for determining regulatory capital adequacy and banks? increasing focus on the risk-return profile in commercial lending. Therefore, the components of internal credit ratings merit not only a qualitative but also a quantitative analysis. Whereas the eligibility of financial factors as inputs for credit ratings is widely accepted, the role of non-financial factors remains ambiguous. Analysing credit file data from four major German banks we find evidence that the combined use of financial and non-financial factors leads to a more accurate prediction of current and future default events than the single use of each of these factors respectively.

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Bibliographic Reference

Grunert, J, Norden, L and Weber, M. 2002. 'The Role of Non-financial Factors in Internal Credit Ratings'. London, Centre for Economic Policy Research.