CREDIT RATINGS AND COMPLEMENTARY SOURCES OF CREDIT QUALITY INFORMATION

Bank regulation has made increasing use of external credit ratings in recent years and, in June 1999, the Basel Committee on Banking Supervision proposed a revision to the international capital accord that included a more prominent role for credit ratings. This study contains background information about credit ratings and complementary sources of credit quality information, which may be helpful to those revising the proposed accord and more generally to those interested in the use of credit ratings in regulation. The focus of the study is on factual information, rather than on subjective assessments or explicit policy recommendations. The material may be classified into four basic categories: (1) facts about the credit ratings industry, such as lists of rating agencies, the extent of their activities, market practices, etc., (2) factual information about alternative sources of credit quality information, (3) summaries of the results of earlier research on credit ratings from various sources, including academics, supervisory institutions, and rating agencies, and (4) empirical work performed specifically for this study, intended to fill in a few gaps in the existing empirical literature. The Working Papers of the Basel Committee on Banking Supervision contain analysis carried out by experts of the Committee or its working groups. They may also reflect work carried out by one or more member institutions or by its Secretariat. The subjects of the Working Papers are of topical interest to supervisors and are technical in character. The views expressed in the Working Papers are those of their authors and do not represent the official views of the Basel Committee, its member institutions or the BIS. Copies of publications are available from: Bank for International Settlements Information, Press & Library Services CH-4002 Basel, Switzerland Fax: +41 61 / 280 91 00 and +41 61 / 280 81 00 This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2000. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated.

[1]  H. Leland..  Corporate Debt Value, Bond Covenants, and Optimal Capital Structure , 1994, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[2]  J. Ingersoll.  A theoretical and empirical investigation of the dual purpose funds , 1976 .

[3]  Jerome S. Fons,et al.  Corporate Bond Defaults and Default Rates 1970–1990 , 1991 .

[4]  Edward I. Altman,et al.  Default Rates in the Syndicated Bank Loan Market: A Mortality Analysis , 2000 .

[5]  Gershon Feder,et al.  Risk Assessments and Risk Premiums in the Eurodollar Market , 1982 .

[6]  M. Livingston,et al.  SPLIT RATINGS, BOND YIELDS, AND UNDERWRITER SPREADS , 1998 .

[7]  Lea V. Carty,et al.  Historical Default Rates of Corporate Bond Issuers, 1920 - 1996 , 1997 .

[8]  Chunsheng Zhou.  A Jump-Diffusion Approach to Modeling Credit Risk and Valuing Defaultable Securities , 1997 .

[9]  W. Perraudin,et al.  The nature of credit risk : the effect of maturity , type of obligor , and country of domicile , 1999 .

[10]  Edward I. Altman,et al.  The importance and subtlety of credit rating migration , 1998 .

[11]  Lina El-Jahel,et al.  Valuation of Defaultable Bonds , 1998 .

[12]  F. Black,et al.  The Pricing of Options and Corporate Liabilities , 1973, Journal of Political Economy.

[13]  Eduardo S. Schwartz,et al.  A Simple Approach to Valuing Risky Fixed and Floating Rate Debt , 1995 .

[14]  E. Altman,et al.  The Implications of Corporate Bond Ratings Drift , 1992 .

[15]  L. G. Perry.  THE EFFECT OF BOND RATING AGENCIES ON BOND RATING MODELS , 1985 .

[16]  Richard Cantor,et al.  Determinants and Impact of Sovereign Credit Ratings , 1996 .

[17]  L. Gucht,et al.  High-Yield Bond Default and Call Risks , 1999, Review of Economics and Statistics.

[18]  Richard Cantor,et al.  Multiple ratings and credit standards: differences of opinion in the credit rating industry , 1996 .

[19]  R. Jarrow,et al.  A Markov Model for the Term Structure of Credit Risk Spreads , 1997 .

[20]  V. Beattie,et al.  Bond ratings and inter-rater agreement: a cross-sectional analysis , 1992 .

[21]  Jean Helwege,et al.  Understanding Aggregate Default Rates of High-Yield Bonds , 1996 .

[22]  P. Cerin,et al.  Who is Rating the Raters , 2001 .

[23]  E. Altman,et al.  Managing Credit Risk: The Next Great Financial Challenge , 1998 .

[24]  Jonathan E. Ingersoll,et al.  AN EXAMINATION OF CORPORATE CALL POLICIES ON CONVERTIBLE SECURITIES , 1977 .

[25]  F. Black,et al.  VALUING CORPORATE SECURITIES: SOME EFFECTS OF BOND INDENTURE PROVISIONS , 1976 .

[26]  Michael J. Brennan,et al.  Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure , 2019, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[27]  国際金融情報センター.  Characteristics and appraisal of major rating companies (1999) : focusing on ratings in Japan and Asia , 1999 .

[28]  Nelson C. Mark,et al.  The Economic Content of Indicators of Developing Country Creditworthiness , 1996, SSRN Electronic Journal.

[29]  W. Perraudin,et al.  Stability of ratings transitions , 2001 .

[30]  Donald P. Morgan.  Judging the risk of banks: what makes banks opaque? , 1998 .

[31]  Stephen Kealhofer,et al.  Uses and Abuses of Bond Default Rates , 2000 .

[32]  Martin S. Fridson,et al.  Forecasting Default Rates on High-Yield Bonds , 1996 .

[33]  Nelson C. Mark,et al.  The Relative Importance of Political and Economic Variables in Creditworthiness Ratings , 1998, SSRN Electronic Journal.

[34]  J. Bohn,et al.  A Survey of Contingent‐Claims Approaches to Risky Debt Valuation , 2000 .

[35]  Frank Packer,et al.  The Samurai Bond Market , 1997 .

[36]  B. Scholtens,et al.  On the Comovement of Bond Yield Spreads and Country Risk Ratings , 1999 .

[37]  D. Duffie,et al.  An Econometric Model of the Term Structure of Interest-Rate Swap Yields , 1997 .

[38]  H. Leland.,et al.  Optimal Capital Structure, Endogenous Bankruptcy, and the Term Structure of Credit Spreads , 1996, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[39]  Richard Cantor,et al.  The Credit Rating Industry , 1995 .

[40]  Richard Cantor,et al.  Sovereign Credit Ratings , 1995 .

[41]  D. Duffie,et al.  Modeling term structures of defaultable bonds , 1999 .

[42]  R. C. Merton,et al.  On the Pricing of Corporate Debt: The Risk Structure of Interest Rates , 1974, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[43]  E. Altman.  Measuring Corporate Bond Mortality and Performance , 1989 .

[44]  Jerome S. Fons,et al.  Measuring Changes in Corporate Credit Quality , 1994 .

[45]  Jonathan E. Ingersoll,et al.  A Contingent-Claims Valuation of Convertible Securities , 1977, World Scientific Reference on Contingent Claims Analysis in Corporate Finance.

[46]  J. Heckman.  Sample selection bias as a specification error , 1979 .

[47]  Wilbert O. Bascom.  Managing Credit Risk , 1997 .

[48]  V. Beattie,et al.  Credit-rating agencies:the relationship between rater agreement and issuer/rater characteristics , 1992 .

[49]  Louis H. Ederington.  Why Split Ratings Occur , 1986 .

[50]  Richard Cantor,et al.  Split Ratings and the Pricing of Credit Risk , 1997 .

[51]  Eduardo S. Schwartz,et al.  Analyzing Convertible Bonds , 1980, Journal of Financial and Quantitative Analysis.

[52]  R. Geske.  The Valuation of Corporate Liabilities as Compound Options , 1977, Journal of Financial and Quantitative Analysis.

[53]  R. Jarrow,et al.  Pricing Derivatives on Financial Securities Subject to Credit Risk , 1995 .

[54]  S. Lee.  Are the credit ratings assigned by bankers based on the willingness of LDC borrowers to repay , 1993 .

[55]  Eduardo S. Schwartz,et al.  Convertible Bonds: Valuation and Optimal Strategies for Call and Conversion , 1977 .

[56]  A. Saunders,et al.  Credit risk measurement: Developments over the last 20 years , 1997 .

[57]  Douglas J. Lucas,et al.  Changes in Corporate Credit Quality 1970–1990 , 1992 .

[58]  P. Asquith,et al.  Original Issue High Yield Bonds: Aging Analyses of Defaults, Exchanges, and Calls , 1989 .