Download Credit Rating and Bank-Firm Relationships: New Models to by Michele Modina PDF

Download Credit Rating and Bank-Firm Relationships: New Models to by Michele Modina PDF

By Michele Modina

This publication explores the function of the score method in creditworthiness evaluate, having a look into its present prestige, strengths and weaknesses and attainable evolution within the gentle of Basel three and the worldwide financial challenge.

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This model allows one to predict with statistical techniques the probability of bankruptcy of a company in the following years. The test was developed by analyzing the balance sheets of 66 publicly held manufacturing companies (ignoring the small and medium-size ones) randomly drawn from Moody’s lists and other sources, half of which had filed for bankruptcy, and the test proved to be able to “predict” the state of bankruptcy with a 95 percent degree of accuracy. Credit Risk Management 29 For the analysis, a list of the most significant fiscal indicators was compiled, grouping them into five classes: liquidity, capital strength, profitability, rotation and operating efficiency of the company.

The following paragraphs provide a general view of existing models in order to highlight the relevant aspects and shortcomings of each approach. 1 The statistical approach The statistical approach is based on a series of rather complex statistical models that lead to a scoring, which means that a score is given to a number of economic and financial indexes, appropriately weighted. Quantitative and qualitative information is processed by the model and leads to a clear and objective result, based on which the decision can be made.

4 The innovations introduced by Basel III The financial crisis of 2007–2008 has made it necessary to define some actions to strengthen the capital base of the banks. In this context, the proposed new system introduced by Basel III, which is the set of rules approved by the Basel Committee on Banking Supervision, is inserted in order to strengthen the current regulations on capital adequacy (better known as Basel II), the effectiveness of supervision and the ability of intermediaries to manage risk.

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