DefaultRisk.com the web's biggest credit risk modeling resource.

Credit Jobs

Home Glossary Links FAQ / About Site Guide Search
pp_score_89

Up

Submit Your Paper

In Rememberance: World Trade Center (WTC)

doi> search: A or B

Export citation to:
- HTML
- Text (plain)
- BibTeX
- RIS
- ReDIF

Bounds for Rating Override Rates

by Dirk Tasche of Financial Services Authority, UK

June 13, 2012

Abstract: Overrides of credit ratings are important correctives of ratings that are determined by statistical rating models. Financial institutions and banking regulators agree on this because on the one hand errors with ratings of corporates or banks can have fatal consequences for the lending institutions and on the other hand errors by statistical methods can be minimised but not completely avoided. Nonetheless, rating overrides can be misused in order to conceal the real riskiness of borrowers or even entire portfolios. That is why rating overrides usually are strictly governed and carefully recorded. It is not clear, however, which frequency of overrides is appropriate for a given rating model within a prede ned time period. This paper argues that there is a natural error rate associated with a statistical rating model that may be used to inform assessment of whether or not an observed override rate is adequate. The natural error rate is closely related to the rating model's discriminatory power and can readily be calculated.

JEL Classification: C52, C44.

AMS Classification: 62P05, 62G05.

Keywords: Credit rating, rating override, discriminatory power, accuracy ratio, misclassification rate.

Books Referenced in this paper:  (what is this?)

Download paper (508K PDF) 23 pages

Most Cited Books within Credit Scoring Papers

[