Catch the Heterogeneity: The New Bank-Tailored Integrated Rating

Daniela Arzu, Marcella Lucchetta and Guido Max Mantovani
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Daniela Arzu: Department of Management, University of Bologna, 40126 Bologna, Italy
Marcella Lucchetta: Department of Economics, University of Venice, 30123 Venezia, Italy
Guido Max Mantovani: International University of Monaco, 98000 Monaco-Ville, Monaco

JRFM, 2021, vol. 14, issue 7, 1-25

Abstract: The purpose of this article is to develop a bank-oriented rating approach, tailored by incorporating the various heterogeneity dimensions characterizing financial institutions, named “Bank-Tailored Integrated Rating” (BTIR). BTIR is able to catch the financial cycle, including the pandemic crisis, and the ongoing change in banking normative from a microeconomic perspective, and it is inherently coherent with the challenging frontier of forecasting tail risk in financial markets in similar ways as in De Nicolò and Lucchetta (2017), although their approach is macroeconomic) since it considers the downside risk in the theoretical framework. The method employed was an innovative integrated rating (IR) statistical and econometrical panel pre-selection analysis that takes into account the characteristics of risk and the greater heterogeneity of the banks. The result is a challenge rating procedure delivering forward-looking preselection requested by the new International Financial Reporting Standard (IFRS-9). The future direction is extremely promising given the increase in idiosyncratic and systemic risks in financial markets.

Keywords: bank-tailored integrated rating; banks’ heterogeneity; financial cycle (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2021
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