SUMMARY

• Provides a unique insight and overview into the many types of ratings that are in use today enabling you to compare and contrast the benefits as well as the potential pitfalls and peculiarities of the various systems

• Designed to help you implement or assess your own internal credit ratings systems with an overview of what is currently available and will alert you to possible problems with individual ratings systems

• Will help to ensure your internal credit rating systems are in line with current regulatory requirements by presenting background information on the new Basel 'Internal Ratings Based Approach' as well as drawing upon relevant case studies that have been carried out on banks preparedness for this

• Presents an up-to-date discussion on how corporate scandals, such as Enron occurred, together with retrospective analysis of the behaviour of public ratings to them

• Discusses the possible flaws associated with the dependence on external ratings in particular situations

• Multi-contributor format edited by the best-selling author and practitioner Michael K. Ong

Return to top | Add to basket | Tell a colleague

  TABLE OF CONTENTS

CONTENTS
Rating credits
Introduction
Michael Ong

1. The A to Z of Standard and Poor's Ratings
Chris Dinwoodie of Standard and Poor's

2. Historical Corporate Rating Migration, Default and Recovery Rates
David Hamilton of Moody's Investors Service

3. Cyclical Effects in Credit Risk Ratings and Default Risk
Linda Allen of Zicklin School of Business, Baruch College, City University of New York and Anthony Saunders of Stern School of Business, New York University

Rating agencies
Introduction
Michael Ong

4. An Analysis of the Credit Rating Industry
Lawrence J. White of Stern School of Business, New York University

5. The Meaning of Agency Ratings: A Behavioural Model of Rating Assignment
Sean C. Keenan and Jorge R. Sobehart of CitiGroup Risk Architecture

6. Hybrid Contingent Claims Models: A Practical Approach to Modelling Default Risk
Jorge R. Sobehart and Sean C. Keenan of CitiGroup Risk Architecture

Credit scoring techniques
Introduction
Michael Ong

7. Revisiting Credit Scoring Models in a Basel II Environment
Edward I. Altman of Stern School of Business, New York University

8. Credit Scoring for Corporate Debt
Eric Falkenstein of Deephaven Capital Management

9. Scoring and Validating Techniques for Credit Risk Rating Systems
Sebastian G. Fritz, Lars Popken and Christian Wagner of Credit Risk Management, Risk Analytics and Instruments, Deutsche Bank AG

10. Replicating Agency Ratings through Multinomial Scoring Models
Andrea Resti of Bergamo University

11. Capital Ratios and Credit Ratings as Predictors of Bank Failures
Arturo Estrella and Stavros Peristiani of Federal Reserve Bank of New York and Sangkyun Park of Office of Management and Budget

Regulatory issues on credit ratings
Introduction
Michael Ong

12. Regulatory use of Credit Ratings: Implications for Banks, Supervisors and Markets.
Barbara C. Matthews of Institute of International Finance

13. Regulatory Capital Based on Bank Internal Ratings of Credit Risk
Jeffrey A. Brown of Risk Analytics Division, Office of the Comptroller of the Currency

14. Supervisory and Regulatory Concerns Regarding Bank Internal Rating Systems
Jose A. Lopez of Federal Reserve Bank of San Francisco and Marc R. Saidenberg of Federal Reserve Bank of New York

15. Regulatory Issues on Credit Ratings
David M. Rowe, Dean Jovic and Marcel Beutler of SunGard Trading and Risk Systems

Internal rating systems of banks
Introduction
Michael Ong

16. Credit Culture
Dev Strischek of SunTrust Bank Inc

17. Internal Risk Rating Systems
Michel Crouhy, Dan Galai and Bob Mark of CIBC

18. The New Capital Accord and Internal Bank Ratings
Donald R. van Deventer and Jaqueline Outram of Kamakura Corporation

19. Designing and Implementing Effective Credit Rating Systems
Thomas Garside and Jonathon Greenman of Oliver, Wyman & Company

20. Preparing for the Internal Ratings-Based Approach
Andrea Szczesny and Ralf Ewert of Johann Wolfgang Goethe University, Frankfurt

21. Some Evidence on the Consistency of Banks' Internal Ratings
Mark Carey of Federal Reserve Board

Credit ratings of asset securitisations
Introduction
Michael Ong

22. Measuring Portfolio Credit Risk with Default Experience Statistic (DES)
Arthur M. Berd of Lehman Brothers

23. EL and DP Approaches to Rating CDOs and the Scope for ″Ratings Shopping″
William Perraudin and Vladislav Peretyatkin of Birkbeck, University of London

24. Rating Based on Credit Portfolio Models
Ludger Overbeck and Hans Lotter of Deutsche Bank AG

Return to top | Add to basket | Tell a colleague

  QUOTES

″Contains a wealth of useful ideas.″
John Hull, Joseph L. Rotman School of Management

Return to top | Add to basket | Tell a colleague

  REVIEW

Reviewed by John Hull
Credit ratings have become progressively more important since they were first introduced in the United States in the early twentieth century. The original role of ratings was to assess the credit risk of corporate bond issues. Today they are frequently cited as general indicators of the financial health of a company. They are used to assess insurance companies, financial guarantees, mutual funds, credit default obligations, and much more. Companies often use credit triggers (which are activated by rating changes) in the contracts they enter into. Under Basel II, ratings will be used to assess credit risk regulatory capital. Many countries outside the United States are taking steps to encourage the formation of local rating agencies. There can be little doubt that the ratings business has been hugely successful. It is now attracting more attention than ever before.

Michael Ong's book Credit Ratings: Methodologies, Rationale and Default Risk published by Risk Books is very timely. It deals with both the ratings produced by rating agencies and those produced internally by banks. The book is a collection of 24 articles written by different authors and grouped into six sections. The first section is entitled Rating Credits. It discusses the purpose of ratings, the process by which they are set, and how successful they have been in predicting defaults. It presents statistics on transition probabilities, recovery rates, default rates, etc. and discusses in some detail cyclical effects. The second section is entitled Rating Agencies. It looks at the economics of a rating agency, presents a behavioural model of how ratings are set, and discusses how the dynamics of a firm's assets can be used to assist in predicting default. The third section is on Credit Scoring Techniques. The credit scoring methodology was pioneered by Altman in the late 1960s and has recently seen a resurgence in popularity, largely because banks are now encouraged to develop their own internal ratings systems under Basel II. The very popular Moody's KMV model can be characterized as a sophisticated credit scoring model. The fourth section is entitled Regulatory Issues on Credit Ratings. This explains how Basel II plans to use credit ratings, both those produced by rating agencies and those produced by the banks themselves, in assigning regulatory capital. It is a useful summary of a very complex area. Section five is entitled Internal Rating Systems of Banks. It includes a total of six articles that provide different perspectives on the issues surrounding the design and implementation of internal ratings models. The topics covered range from the importance of the credit culture to the consistency of ratings. The final section is entitled Credit Ratings of Asset Securitizations. It consists of three articles, all focussing on the rating of the tranches in credit default obligations.

The book contains a wealth of useful ideas. There is some repetition, but this is almost inevitable when each chapter is written by a different author. Most people concerned with credit risk evaluation will find this book a useful acquisition.

Reviewed by Didier Cossin
Professor of Finance and Director, Institute of Banking and Finance, HEC, University of Lausanne;
forthcoming UBS Chair in Banking and Finance, IMD, Lausanne.

This hefty volume encompasses 24 contributions to the understanding of ratings. The papers address both public and internal ratings, their uses, their limitations, and the new assessment and validation techniques that are currently arising. There is a good mix of papers written by academics and papers written by practitioners. The academic papers tend to be very applied themselves, making the overall volume very pertinent to sophisticated practitioners.

Overall, this is a useful, timely work on ratings. While several books have come out recently on credit risk, there has been very little that has been dedicated to credit ratings themselves. On the other hand, ratings have become more and more important in the overall credit process. They are expected to become even more important with Basel II. They are being used systematically, notably in areas in which almost no alternative exists to assess the risk of the instrument (as in CDOs).

The book is very timely as well, with data analysis that bears on very recent times (up to 2002).

As usual in an edited volume, the quality of the contributions varies. Nonetheless, and this is what should matter to the reader, many of the papers are very interesting and bring new techniques or new ideas to the forefront. The editor ties the papers together well. Indeed, if some repetitions remain (notably on internal ratings) and if the book does not read like a single-author book, it remains very approachable and overall rich of ideas and applications. Also, the book offers useful ″panels″, short captions summarizing an idea, detailing a technique, detailing a taxonomy or giving a brief analysis of a specific topic. I found these panels particularly useful and interesting. They also give a good idea of the breadth of the volume.

The book covers ratings themselves, the agencies, credit scoring techniques, regulatory issues, internal ratings, and credit ratings of asset securitization (mainly CDOs and portfolio issues). It thus covers what one would expect to find in a book on ratings, plus some more, with a good stress on recent issues, notably internal ratings and CDOs.

Some of the papers stood out particularly well in my mind. Some offered the type of analysis one would expect in such a volume, but very well done. For example, the Hamilton (Moody's ) paper on rating transitions and recoveries offered an interesting recap and analysis of the recent history. The papers on scoring are solid (with the contribution of Altman notably, but also with the interesting multinomial logit development of Andrea Resti). Some others addressed either new ideas or renewed ideas with success: the Allen and Saunders paper on cyclicality in ratings seems particularly pertinent these days; the Crouhy, Galai and Mark paper on internal ratings gives a solid foundation. And, for us finance people, the Strischeck paper on Credit Culture is an excellent reminder of what lies behind such a complex process as the credit process. Something good to remember as we repair from the Enron times. Arguably, this paper could have been placed to stand out more in the book. I found the CDO papers valid and instructive as well, although it is hard to be definitive on this matter (as the different authors mention it themselves): the issue is certainly complex.

Overall, there are too many interesting contributions to describe them all here. It certainly is to the credit of the book, its editor and its authors. I expect this volume to become a standard, highly quoted reference.

Return to top | Add to basket | Tell a colleague

  AUTHOR BIOGRAPHY

Michael K. Ong is professor of finance and director of the finance program at The Stuart Graduate School of Business, Illinois Institute of Technology. He is also executive director of the Center for Financial Markets. Until recently, Dr Ong was executive vice president and chief risk officer for Credit Agricole Indosuez in New York. He had enterprise-wide responsibility for all risk management functions for corporate banking, merchant banking, asset management, capital markets activities, and the Carr Futures Group. Dr Ong received a BS degree in physics, MS degree in applied mathematics, and a PhD degree in applied mathematics from the State University of New York at Stony Brook.

Return to top | Add to basket | Tell a colleague

  CONTRIBUTORS

Chris Dinwoodie of Standard and Poor's, David Hamilton of Moody's Investors Service, Linda Allen of Zicklin School of Business, Baruch College, City University of New York and Anthony Saunders of Stern School of Business, New York University, Lawrence J. White of Stern School of Business, New York University, Sean C. Keenan and Jorge R. Sobehart of CitiGroup Risk Architecture, Jorge R. Sobehart and Sean C. Keenan of CitiGroup Risk Architecture, Edward I. Altman of Stern School of Business, New York University, Eric Falkenstein of Deephaven Capital Management, Sebastian G. Fritz, Lars Popken and Christian Wagner of Credit Risk Management, Risk Analytics and Instruments, Deutsche Bank AG, Andrea Resti of Bergamo University, Arturo Estrella and Stavros Peristiani of Federal Reserve Bank of New York and Sangkyun Park of Office of Management and Budget, Barbara C. Matthews of Institute of International Finance, Jeffrey A. Brown of Risk Analytics Division, Office of the Comptroller of the Currency, Jose A. Lopez of Federal Reserve Bank of San Francisco and Marc R. Saidenberg of Federal Reserve Bank of New York, David M. Rowe, Dean Jovic and Marcel Beutler of SunGard Trading and Risk Systems, Dev Strischek of SunTrust Bank Inc, Michel Crouhy, Dan Galai and Bob Mark of CIBC, Donald R. van Deventer and Jaqueline Outram of Kamakura Corporation, Thomas Garside and Jonathon Greenman of Oliver, Wyman & Company, Andrea Szczesny and Ralf Ewert of Johann Wolfgang Goethe University, Frankfurt, Mark Carey of Federal Reserve Board, Arthur M. Berd of Lehman Brothers, William Perraudin and Vladislav Peretyatkin of Birkbeck, University of London, Ludger Overbeck and Hans Lotter of Deutsche Bank AG
Return to top | Add to basket | Tell a colleague

  CUSTOMERS WHO BOUGHT THIS TITLE ALSO BOUGHT:

  Derivative Credit Risk - Edited By Various
  The Definitive Guide to CDOs - Edited By Gunter Meissner
  Asset-Backed Credit Derivatives - By Peter B. Nowell
  Recovery Risk - Edited By Edward Altman, Andrea Resti and Andrea Sironi

Return to top | Add to basket | Tell a colleague