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Using historical data on sovereign and individual borrowers, the authors assess the potential impact on non-high-income countries of linking capital asset requirements for banks to private sector ratings, as the Basel committee has proposed. They show that linking bank's capital asset requirements to external ratings would have undesirable effects...
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... The main one is that rating agencies, both Russian and global, are usually slow in updating their grades, and banks with an investment grade sometimes lose their license. Ferri et al. [18] found that credit ratings alone are not sufficient to reliably predict bank failures. Karminsky and Kostrov [19] produced similar results for the Russian banking sector. ...
This paper aims to discover portfolio allocation strategies that facilitate a bank’s stability. The paper examines the phenomenon of massive failures of Russian banks in the period from 2013 to 2019, in order to identify which of the banks’ strategic decisions regarding assets and liabilities, as well as portfolio structure, lead to higher stability. The dataset contains financial indicators and prudential ratios of 895 commercial banks operating in Russia during that period. 507 banks, or 57% of all banks, lost their license during the considered period. Cases of bank failures were classified depending on whether the Central Bank identified any illegal activities conducted by the failed bank. The high failure rate provides an opportunity to study the differences between failed and non-failed banks in order to determine the factors associated with lowerfailure probability. Following the approach applied in most of the previous studies, we use a logistic regression to model the effect of different asset and liability portfolio structure on the failure probability. The hypothesis that failure probability of a bank is affected by its strategic focus of forming an assets and liabilities portfolio was statistically confirmed. We found that the focus of a bank’s activity on providing loans to individuals and attracting deposits from companies leads to lower failure probability, confirming the results of previous studies. Also, we found that more active cooperation with other banks in terms of both borrowing and lending is associated with lower failure probability. Furthermore, we found that banks are less likely to borrow from or lend money to their fellow banks that later fail with illegal activity accusations.Finally, we found that unlike the EU banks, Russian banks with higher profitability ratios are more stable. The results are relevant for industry practitioners in facilitating the development of a more resilient bank strategy, as well as for regulators for incorporation in early warning models.
... There is empirical evidence documenting the impact of the institutional environment on both firm entry (Klapper et al., 2004, andLove, 2010) and firm growth (Batra andStone, 2008, andWoodruff, 2003). Additionally, especially in developing countries, bank and corporate ratings depend on both the government's creditworthiness and on the general business environment, making debt contracting more expensive in countries with poor business environment ratings (Majnoni et al., 1999, andNguyen andKnyphausen-Aufseß, 2014). Governance indicators on corruption, government effectiveness, and regulatory quality matter for firm performance, as measured by employment, investment and sales growth (Batra and Stone, 2008). ...
... This may have severe impact on the macro-economic stability. For example, Ferri et al. (2000) show that during the East Asian currency crisis of 1997-98, following Moody's downgradation of sovereign ratings for Indonesia, Korea and Thailand, the corporate ratings were also downgraded sharply in these countries, leading to a sharp fall in the international capital flows in the region. Interestingly, even when the sovereign ratings of Korea and Thailand were upgraded in 1999 following the macro-economic recovery, corporate ratings continued to remain 'speculative grade'. ...
In this paper an analytical review of the capital adequacy regime and the present state of capital to risk-weighted asset ratio (CRAR) of the banking sector in India has been presented. In the current regime of Basel I, Indian banking system is performing reasonably well, with an average CRAR of about 12 per cent, which is higher than the internationally accepted level of 8 per cent as well as India’s own minimum regulatory requirement of 9 per cent. As the revised capital adequacy norms, Basel II, are being implemented from March 2008, several issues emerge. These issues from the Indian perspective has been examined.[Working Paper No. 196]
... 26. On this issue, s ee Ferri, Liu, and Majnoni (2000). 27. ...
This paper deals with the appropriate design of capital adequacy requirements in emerging markets. It divides countries in two groups according to their capacity to enforce regulatory capital. The first group is characterized by an inappropriate accounting standards and reporting systems, improper classification of non-performing loans and deficient legal and judicial frameworks, and high concentration of asset ownership. It is shown that under these conditions, capital ratios can not perform their supervisory role of containing excessive risk-taking activities by banks. The sustainable policy for these countries consists of removing the constraints to the effectiveness of capital standards; however, those policy reforms often take a significant amount of time. During the transition period, it is essential to identify and develop indicators of banking problems that reveal the true riskiness of banks. Recommendations for policymakers, therefore, focus on strengthening the role of market discipline to substitute for the inadequacies of the regulatory capital requirements. In the second group of countries, a continuous increase in the participation of foreign banks from industrial countries is de facto reducing the degree of related-lending activities. The combination of competition induced by the entry of new providers of wealth and improved accounting, regulatory, and supervisory frameworks can contribute towards increasing the usefulness of capitalization ratios. The main recommendation for this group is to design a capital standard that appropriately reflects the risk of banks' assets. The standard should have two basic components. The first is the development of risk-based regulations in loan-loss provisions. The second is the establishment of a reduced number of risk categories to classify assets, with the central qualification being that the categories of risk should reflect the particular features of banks’ assets in emerging markets. Issues that need to be considered include an adequate risk assessment of government paper and the introduction of distinct capital charges for borrowers in the tradable and non-tradable sectors.
... Moreover, they aggravated the East Asian crisis by downgrading East Asian crisis countries more than the worsening in these countries' economic fundamentals would have justified. In a companion paper Ferri et al. (2000) show that, differently from corporate ratings, banks ratings tend to be strictly dependent on sovereign ratings and therefore are bound to share the same problems. No study we know of has, however, looked at the informational content of credit ratings of individual banks and has compared them with other indicators of financial fragility. ...
We explore for individual banks, active in the East Asian countries during the years 1996–1998, the performance of three sets of indicators of bank fragility that can be computed from publicly available information: accounting data, stock market prices, and credit ratings. We find significantly different patterns among the three groups of indicators in their ability of forecasting financial distress at a specific point in time and over time. More specifically, in the East Asia crisis episode the information based on stock prices or on judgmental assessments of credit rating agencies did not outpace backward looking information contained in balance sheet data. Stock market based information, though, has responded more quickly to changing financial conditions than ratings of credit risk agencies. Overall, the evidence supports the policy conclusion that, where the information processing is quite costly, as in most developing countries, it is important to use simultaneously a plurality of indicators to assess bank fragility.
... Indeed, this fear has some empirical basis. In their study using historical data on sovereign and individual borrowers, Ferri et al. (2000) found that: ...
Despite the measures that have already been put in place to strengthen the international financial architecture in the wake of the Asian financial crisis, still much remain to be done. This paper tried to distinguish developing economies’ views, in general, and East Asian views, in particular, on reforming the international financial architecture from the G7 and G7-led institutions’ views and found substantial differences. From East Asia’s and developing economies’ perspective, the present discussions on reforming the international financial architecture that take place mainly within G7 and G7-led institutions are unlikely to lead to solutions for the prevention of future crises. East Asia’s and developing economies’ concern regarding the governance structure for reforming the international financial architecture and the Bretton Woods Institutions, establishment of regional financial arrangement, and some of the substantive aspects of the proposed reform package deserve to be given utmost consideration in discussions on strengthening the international financial system.
https://revistas.up.ac.pa/index.php/faeco_sapiens/article/view/3397
We present a new approach for estimating small business equity returns. This approach applies the Merton (1974) credit model to the returns on entrepreneurial business credit card debt securitizations and solves for the implied equity returns for the small businesses owned by the cardholders. The estimated small business equity premium is 10.74%. The standard deviation of small business equity returns is 56.37%. We validate the methodology by applying it to investment-grade corporate bonds and recovering a public equity premium of 6.17%.
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This paper seeks to develop a literature review within the main aspects of credit information in emerging markets,
important aspect considering that several companies, including the small enterprises, are looking forward to “go”
to capital markets. Thus, we will analyze the role of rating agencies and credit bureaus (credit risk report) in the
Peruvian market, considering the current state of economic growth that comes through and, the potential of
capital market that comes with MILA (Integrated Latin American Market). Besides, this information will become
relevant in the following months, because the actual financial crisis in several countries all over the world (focus
in Europe, but it could move to some BRICS – Brazil, Russia, India, China and South Africa – or Latam
Countries) has generated a new map in “rating scores” (Note 1) so the questions that we tried to answer is if this
unique change is relevant? Or it should be complemented in order to have a significant impact in the market and
for the investors.
Financial early warning (FEW) models aim to help companies recognize possible financial crises and reduce financial risks through generating FEW messages. The current FEW models are mainly constructed by a set of financial indicators and the predictive accuracy has only been verified by these financial indicators rather than non-financial indicators. The issue in such a situation is that these financial indicators can be controlled or manipulated by related senior managerial personnel of companies, and therefore, using only financial indicators to verify FEW models cannot ensure the reliability of predictive accuracy of the models. To handle this issue, this paper develops a new FEW logit model which has better predictive accuracy than existing ones. More importantly, we propose a new approach which verifies the predictive accuracy of the logit model by using non-financial efficiency indicators of data envelopment analysis. An empirical study on Chinese company datasets revealed that the accuracy rates of predictions of the proposed model, for in-sample and out-of-sample companies, are 97.1% and 94.1% respectively, higher than existing results. Using non-financial efficiency indicators, the verification rates for the prediction results of the logit model for in-sample and out-of-sample companies are 95.8% and 96.2%, respectively. The findings show that the proposed FEW logit model has improved the accuracy of prediction and stability; the approach which uses non-financial efficiency indicators to verify the results of FEW logit model has significantly ensured the reliability of the FEW models.
