Basel II, Sovereign Ratings and Transfer Risk External versus Internal Ratings
Preprint
- 6 March 2003
- preprint
- Published by Elsevier in SSRN Electronic Journal
Abstract
Basel II puts great emphasis on external ratings, including from rating agencies, to quantify credit risks. It also allows financial institutions to use internal risk ratings. This is also the case for international lending, but following recent emerging markets' crises, the quality of sovereign ratings has received some criticism. At the same time, little is known about the quality of internal country risk ratings. Using data from a major international bank, we assess the consistency between internal and external country ratings and the behavior of the two sets of ratings. We find that internal and external ratings are driven by similar factors and both underestimate "event risks" but external ratings are somewhat slower in adjusting to a financial crisis than internal ones.Keywords
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