Search Results
Working Paper
Credit ratings and bank monitoring ability
In this paper we use credit rating data from two large Swedish banks to elicit evidence on banks? loan monitoring ability. For these banks, our tests reveal that banks? credit ratings indeed include valuable private information from monitoring, as theory suggests. However, our tests also reveal that publicly available information from a credit bureau is not efficiently impounded in the bank ratings: The credit bureau ratings not only predict future movements in the bank ratings but also improve forecasts of bankruptcy and loan default. We investigate possible explanations for these findings. ...
Working Paper
Credit ratings and bank monitoring ability
In this paper, the authors use credit rating data from two Swedish banks to elicit evidence on banks' loan monitoring ability. They test the banks' ability to forecast credit bureau ratings, and vice versa, and show that bank ratings are able to predict future credit bureau ratings. This is evidence that bank credit ratings, consistent with theory, contain valuable private information. However, the authors also find that public ratings have an ability to predict future bank ratings, implying that internal bank ratings do not fully or efficiently incorporate all publicly available information. ...
Speech
Early lessons from recent financial turmoil.
Presented by Eric S. Rosengren, President and Chief Executive Officer, Federal Reserve Bank of Boston, for the South Shore Chamber of Commerce, Quincy, MA, March 6, 2008
Working Paper
How consistent are credit ratings? a geographic and sectoral analysis of default risk
We examine differences in default rates by sector and obligor domicile. We find evidence that credit ratings have been imperfectly calibrated across issuer sectors in the past. Controlling for year of issue and rating, default rates appear to be higher for U.S. financial firms than for U.S. industrial firms. Sectoral differences in recovery rates do not offset the higher default rates. By contrast, we do not find significant differences in default rates between U.S. and foreign firms.
Working Paper
The evolution and determinants of emerging market credit spreads in the 1990s
This paper develops measures of emerging market credit spreads for the 1990s, based on data on new bond issues and bank loans, that cover a broader range of borrowers than the Brady bond spreads most commonly used to date. These measures are used to identify the impacts of credit ratings, maturity and currency denomination on spreads. We find important regional differences in spreads across the developing world, even after controlling for risk and maturity. We also identify the evolution of spreads during the 1990s up until the advent of the Asian financial crisis, holding other determinants ...
Working Paper
Constant proportion debt obligations: a post-mortem analysis of rating models
In its complexity and its vulnerability to market volatility, the CPDO might be viewed as the poster child for the excesses of financial engineering in the credit market. This paper examines the CPDO as a case study in model risk in the rating of complex structured products. We demonstrate that the models used by S&P and Moody's would have assigned very low probability to the spread levels realized in the investment grade corporate credit default swap market in late 2007, even though these spread levels were comparable to those of 2002. The spread levels realized in the first quarter of 2008 ...
Working Paper
The surprising use of credit scoring in small business lending by community banks and the attendant effects on credit availability and risk
The literature has documented a positive relationship between the use of credit scoring for small business loans and small business credit availability, broadly defined. However, this literature is hampered by the fact that all of the studies are based on a single 1998 survey of the very largest U.S. banking organizations. This paper addresses a number of deficiencies in the extant literature by employing data from a new survey on the use of credit scoring in small business lending, primarily by community banks. The survey evidence suggests that the use of credit scores in small business ...
Working Paper
Do banks price their informational monopoly?
Modern corporate finance theory argues that although bank monitoring is beneficial to borrowers, it also allows banks to use the private information they gain through monitoring to "hold-up" borrowers for higher interest rates. In this paper, we seek empirical evidence for this information hold-up cost. Since new information about a firm's credit-worthiness is revealed at the time of its first issue in the public bond market, it follows that after firms undertake their bond IPO, banks with an exploitable information advantage will be forced to adjust their loan interest rates downwards, ...
Journal Article
Your credit score is a ranking, not a score
With credit scores affecting so many important aspects of our lives, it?s no wonder that people are concerned with improving their scores. Once they start to pay attention to them, though, consumers often find their scores changing in unpredictable ways. Knowing that your score is not a rating of your creditworthiness but a measure of where your creditworthiness ranks relative to everyone else is the first step in understanding your score and how to manage it.