Discussion paper

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

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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Citation

Weber, M, J Grunert and L Norden (2002), ‘DP3415 The Role of Non-financial Factors in Internal Credit Ratings‘, CEPR Discussion Paper No. 3415. CEPR Press, Paris & London. https://cepr.org/publications/dp3415