Rating the Raters. Some Perspective From a Central Bank

Francesco Columba, Federica Orsini () and Stefano Tranquillo ()
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Federica Orsini: Bank of Italy
Stefano Tranquillo: Bank of Italy

No 55, Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) from Bank of Italy, Directorate General for Markets and Payment System

Abstract: We employ the central bank’s credit assessment system for non-financial firms as a benchmark to assess the ratings set by commercial banks with their internal systems and used for monetary policy purposes. We examine the distribution of ratings on bank loans pledged as collateral in monetary policy in Italy and test for risk under-reporting, found by Behn et al. (2022) and Calza et al. (2021), which might generate an unwarranted exposure for the central bank. The rating systems of banks and of the central bank show a satisfactory discriminatory power and predictive capacity, suggesting both evaluate credit risk adequately. We find banks’ models to be on average slightly less conservative than the central bank model for borrowers with loans eligible for collateral. We observe only some mild evidence of low economic significance that banks may strategically manage the credit risk assessment for borrowers whose loans are pledged. We do not find evidence that banks with higher central bank liquidity utilization are more lenient in assigning default probabilities to their debtors

Keywords: Model-based ratings; Credit risk; Collateral; Central bank refinancing (search for similar items in EconPapers)
JEL-codes: D82 E52 G21 G24 G32 (search for similar items in EconPapers)
Date: 2024-12
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wpmisp:mip_055_024

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