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Credit risk and bank lending in the Czech Republic
Czech Republic: credit rating systems are important for banks and for regulatory provisioning.
Authors:
N. Kadlcakova; J. Keplinger
Publisher:
Czech National Bank, Czech Republic, 2004
How important are rating systems? Can input data problems in credit risk modeling be overcome?
The authors argue that the creation of a rating system is an essential requirement in credit risk management. While rating systems may prove useful for a large array of bank activities, they are becoming increasingly relevant for regulatory and economic capital provisioning.
The paper constructs a rating system for the Czech corporate sector reflecting systemic default trends. It uses a solvency index provided by a specialised credit information agency (Creditreform). Furthermore, the authors establish links to the bank credit information contained in the databases of the Czech National Bank. Several validating tests show that the constructed rating system displays relatively similar performance parameters compared to the rating systems constructed on the basis of Creditreform data in Austria or Germany.
Major implications are:
- the construction of the rating system reinforces the conclusion that a trade-off may be reached between the quality and quantity of the required input data in credit risk modeling
- the risk capital estimations suggest that the New Basel Accord would require capital cushions in the range estimated by the credit risk models at a 95% confidence level
- the lowest economic capital values predicted by the CreditMetrics model are due to several simplifications made to circumvent the non-availability of input data into this model.
The systemic focus is accomplished by considering Czech industries and estimating all the required risk inputs at this level. In this sense the paper answers questions from a “macro” lending view. The results can be seen as an overall empirical assessment of the New Basel Capital Accord (NBCA) and of several credit risk models analyzing the credit conditions in the Czech economy. On the other hand this paper builds upon prior research undertaken in the Czech National Bank on credit risk modeling and can be seen as a reference for banks that are going to implement credit risk models at a local level.
Summary originally provided by GDNet, an Eldis content partner
