Bank Credit Risk Management and Migration Analysis; Conditioning Transition Matrices on the Stage of the Business Cycle

Dimitris Gavalas () and Theodore Syriopoulos ()

International Advances in Economic Research, 2014, vol. 20, issue 2, 166 pages

Abstract: Credit risk has been one of the most active areas of recent financial research. It is driven by advances in portfolio risk measurement and management techniques, growth in credit derivatives trading, the Basel II implementation, and regulatory concerns stemming from the commercial credit crunch that initially took place in 2001 and 2002 in the USA. Within this broader literature, a growing body of research analyzes the meaning, role, and influence of credit ratings that quantify credit risk. This paper examines the two-way links between credit risk measurement and the macroeconomic conditions, interpreted through phases of business cycles. We propose a methodology applied on bank internal rating data, which estimates ratings migration probabilities while integrating the state of the economy. We first discuss the issue of whether credit risk is low or high in different economic scenarios. In order to evaluate this prospect, we examine each year in four quarters that represent different scenarios throughout the year. We then review how macroeconomic considerations are incorporated into credit risk models and the risk measurement approach that underlies Basel II and Basel III. Copyright International Atlantic Economic Society 2014

Keywords: Credit ratings migration; Business cycle; Maximum likelihood; Stress testing; Basel III; E1; E020; E32; C110; C130; C150 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1007/s11294-014-9459-y (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:kap:iaecre:v:20:y:2014:i:2:p:151-166:10.1007/s11294-014-9459-y

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/11294

DOI: 10.1007/s11294-014-9459-y

Access Statistics for this article

International Advances in Economic Research is currently edited by Katherine S. Virgo

More articles in International Advances in Economic Research from Springer, International Atlantic Economic Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().