DP3415 The Role of Non-financial Factors in Internal Credit Ratings

Author(s): Jens Grunert, Lars Norden, Martin Weber
Publication Date: June 2002
Keyword(s): credit ratings, credit risk, debt default, probit analysis
JEL(s): G21
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=3415

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.