Showing papers on "Credit reference published in 2009"
Posted Content•
TL;DR: This article found that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit-card debt, controlling for disposable income, other socio-demographics, and credit constraints.
Abstract: Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints.
652 citations
TL;DR: In this article, the authors consider the trade-offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit, and identify the response of accounts payable and accounts receivable to changes in the cost of inventories, profitability, risk and liquidity.
Abstract: Trade credit is an important source of finance for firms and has been well researched, but the focus has been on financial trade-offs. In this paper, we consider the trade-offs with inventories and develop a simple model that recognizes the incentives a firm faces to offer and receive trade credit. Our model identifies the response of accounts payable and accounts receivable to changes in the cost of inventories, profitability, risk and liquidity, and importantly, this influence operates through a production channel. Our results support the model and complement many existing studies focused on explaining the financial terms of trade credit.
258 citations
TL;DR: In this article, the authors investigated whether and how rating agencies respond to regulatory pressure and investor criticism for their ratings' lack of timeliness, and they found that the rating agencies not only improve rating accuracy, but also increase rating accuracy and reduce rating volatility.
230 citations
TL;DR: For low-quality borrowers, the review procedure seems to have developed into an implicit contract as discussed by the authors, inducing the companies "on watch" to abstain from risk-augmenting actions.
Abstract: Credit rating agencies do not only disclose simple ratings but announce watchlists (rating reviews) and outlooks as well. This paper analyzes the economic function underlying the review procedure. Using Moody's rating data between 1982 and 2004, we find that for borrowers of high creditworthiness, rating agencies employ watchlists primarily in order to improve the delivery of information. For low-quality borrowers, in contrast, the review procedure seems to have developed into an implicit contract a la Boot et al. (2006), inducing the companies "on watch'' to abstain from risk-augmenting actions. The agencies' economic role hence appears to have been enhanced from a pure information certification towards an active monitoring function.
205 citations
TL;DR: In this paper, the SEC certified a fourth credit rating agency, Dominion Bond Rating Service (DBRS), for use in bond investment regulations, and showed that bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies.
Abstract: In February 2003, the SEC officially certified a fourth credit rating agency, Dominion Bond Rating Service ("DBRS"), for use in bond investment regulations. After DBRS certification, bond yields change in the direction implied by the firm's DBRS rating relative to its ratings from other certified rating agencies. A one notch better DBRS rating corresponds to a 42 basis point reduction in a firm's debt cost of capital. The impact on yields is driven by cases where the DBRS rating is better than other ratings and is larger among bonds rated near the investment-grade cutoff. These findings indicate that ratings-based regulations on bond investment affect a firm's cost of debt capital.
188 citations
TL;DR: In this article, the credit risk effect manifested itself due to the poor performance of low-rated stocks during periods of financial distress at least three months before and after credit rating downgrades.
Abstract: Low credit risk firms realize higher returns than high credit risk firms. This effect is puzzling because investors seem to pay a premium for bearing credit risk. This paper shows that the credit risk effect manifests itself due to the poor performance of low-rated stocks during periods of financial distress at least three months before and after credit rating downgrades. Around downgrades, low-rated firms experience considerable negative returns amid strong institutional selling, whereas returns do not differ across credit risk groups in stable or improving credit conditions. Remarkably, the group of low-rated stocks driving the credit risk effect accounts for about 4.2% of the total market capitalization. Isolating the credit risk effect to a limited number of firms in a specific set of circumstance allows us to distinguish between its potential explanations. Our evidence points away from risk-based explanations, and towards mispricing generated by retail investors and sustained by illiquidity and short sell constraints.
187 citations
Posted Content•
Abstract: Analysis of survey data collected from 6,520 students at a large Midwestern University affirmed that financial knowledge is a significant factor in the credit card decisions of college students but not entirely in expected ways. Results of a double hurdle analysis indicated that students with relatively higher levels of financial knowledge were not significantly different from students with relatively lower levels in terms of the probability of having a credit card balance. Contrary to expectations, those with higher levels of financial knowledge had significantly higher credit card balances. Overall, the present findings highlight the complex nature of the relationship between personal financial knowledge and credit card behavior.
186 citations
Posted Content•
TL;DR: In this paper, the authors investigate the link between account activity and information production on borrower quality and find that credit line usage, limit violations, and cash inflows exhibit abnormal patterns approximately 12 months before default events.
Abstract: We investigate the link between account activity and information production on borrower quality. Based on a unique data set, we find that credit line usage, limit violations, and cash inflows exhibit abnormal patterns approximately 12 months before default events. Measures of account activity substantially improve default predictions and are especially helpful for monitoring small businesses and individuals. We also find that the early warning indications from account activity result in higher loan spreads, and in a higher likelihood of limit reductions and complete write-offs. Our results highlight that the information on account activity provides banks with a real-time window into the borrower’s cash flows, creating a unique advantage over non-bank lenders and capital markets.
182 citations
TL;DR: In this article, the authors provide a methodological bridge leading from the well-developed theory of credit rationing to the less developed territory of empirically identifying credit constraints by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing and risk rationing.
Abstract: This article provides a methodological bridge leading from the well‐developed theory of credit rationing to the less developed territory of empirically identifying credit constraints. We begin by developing a simple model showing that credit constraints may take three forms: quantity rationing, transaction cost rationing, and risk rationing. Each form adversely affects household resource allocation and thus should be accounted for in empirical analyses of credit market performance. We outline a survey strategy to directly elicit households’ status as unconstrained or constrained in the credit market and, if constrained, to further identify which of the three nonprice rationing mechanisms is at play. We discuss several practical issues that arise due to the use of a combination of “factual” and “interpretative” survey questions. Finally, using a farm‐level data set from Peru, we illustrate how the methodology can be used to estimate the impacts of credit constraints.
175 citations
TL;DR: This paper examined the use of credit derivatives by US bank holding companies with assets in excess of one billion dollars from 1999 to 2005 and found that only 23 large banks out of 395 use credit derivatives and most of their derivatives positions are held for dealer activities rather than for hedging of loans.
Abstract: Before the credit crisis that started in mid-2007, it was generally believed by top regulators that credit derivatives make banks sounder. In this paper, we investigate the validity of this view. We examine the use of credit derivatives by US bank holding companies with assets in excess of one billion dollars from 1999 to 2005. Using the Federal Reserve Bank of Chicago Bank Holding Company Database, we find that in 2005 the gross notional amount of credit derivatives held by banks exceeds the amount of loans on their books. Only 23 large banks out of 395 use credit derivatives and most of their derivatives positions are held for dealer activities rather than for hedging of loans. The net notional amount of credit derivatives used for hedging of loans in 2005 represents less than 2% of the total notional amount of credit derivatives held by banks and less than 2% of their loans. We conclude that the use of credit derivatives by banks to hedge loans is limited because of adverse selection and moral hazard problems and because of the inability of banks to use hedge accounting when hedging with credit derivatives. Our evidence raises important questions about the extent to which the use of credit derivatives makes banks sounder.
171 citations
Patent•
20 Oct 2009
TL;DR: In this article, a method is provided to evaluate an individual's creditworthiness using income risk based credit score, thereby providing creditors, lenders, marketers, and companies with deeper, new insights into consumer's credit risk and repayment potential.
Abstract: Systems and methods are described for scoring consumers' credit risk by determining consumers' income risk and future ability to pay. Methods are provided for measuring consumers' income risk by analyzing consumers' income loss risk, income reduction risk, probability of continuance of income, and economy's impact on consumers' income. In one embodiment, a method is provided to evaluate an individual's creditworthiness using income risk based credit score thereby providing creditors, lenders, marketers, and companies with deeper, new insights into consumer's credit risk and repayment potential. By predicting consumers' income risk and the associated creditworthiness the present invention increases the accuracy and reliability of consumers' credit risk assessments, results in more predictive and precise consumer credit scoring, and offers a new method of rendering a forward-looking appraisal of an individual's ability to repay a debt or the ability to pay for products and services.
Book•
02 Mar 2009
TL;DR: In this paper, the authors present an overview of the credit rating process and its application in the context of credit ratings, highlighting the need for credit ratings as a solution to information asymmetry.
Abstract: Foreword Preface 1 Introduction 1.1 Context and Premises 1.2 Book Chapters 1.3 Supporting Materials PART A: CREDIT RATING FOUNDATIONS 2 Credit Ratings 2.1 The World of Corporate Defaults 2.2 Credit Rating Scales 2.3 The Interpretation of Credit Ratings 2.4 Credit Ratings: Summary and Conclusions 3 The 'Raison d'Etre' of Credit Ratings and Their M arket 3.1 Needs for Credit Ratings - or the Demand Side of Ratings 3.2 Credit Ratings as a Solution to Information Asymmetry: Economic Analysis. 3.3 Credit Rating Segments - or Scale and Scope of the Rated Universe. 4 How to Obtain and Maintain a Credit Rating 4.1 The Rating Preparation 4.2 The Rating 4.3 Quality of the Rating Process PART B: CREDIT RATING ANALYSIS 5 The France Telecom Credit Rating Cycle 5.1 From Sovereign Status to Near Speculative Grade 5.2 Turning Point and Rating Recovery (Fall 2002-Winter 2004) 5.3 Analysis and Evaluation 6 Credit Rating Analysis 6.1 Fundamental Corporate Credit Ratings 6.2 Corporate Ratings Implied by Market Data 6.3 Special Sector Ratings 6.4 Technical Appendix 7 Credit Rating Performance 7.1 Relevance: Ratings and Value. 7.2 Preventing Surprise in Defaults: Rating Accuracy and Stability 7.3 Efficiency Enhancement: Stabilization in Times of Crisis PART C: THE CREDIT RATING BUSINESS 8 The Credit Rating Industry 8.1 The Rise of the Credit Rating Agencies 8.2 Industry Specifics and How they Affect Competition 8.3 Industry Performance 9 Regulatory Oversight of the Credit Rating Industry 9.1 The Regulatory Uses of Ratings 9.2 The Regulation of the Industry 9.3 Analysis and Evaluation 10 Summary and Conclusions 10.1 The Rating Agencies Value Added 10.2 The Challenges Rating Agencies Face Today 10.3 Concluding Thoughts References Index
Journal Article•
TL;DR: The proposals made in this paper are likely to have beneficial attributes in terms of cost savings and time efficiency and the significance of the application of the techniques reviewed here is in the minimization of credit card fraud.
Abstract: Fraud is one of the major ethical issues in the credit card industry. The main aims are, firstly, to identify the different types of credit card fraud, and, secondly, to review alternative techniques that have been used in fraud detection. The sub-aim is to present, compare and analyze recently published findings in credit card fraud detection. This article defines common terms in credit card fraud and highlights key statistics and figures in this field. Depending on the type of fraud faced by banks or credit card companies, various measures can be adopted and implemented. The proposals made in this paper are likely to have beneficial attributes in terms of cost savings and time efficiency. The significance of the application of the techniques reviewed here is in the minimization of credit card fraud. Yet there are still ethical issues when genuine credit card customers are misclassified as fraudulent.
TL;DR: The 2005 US Bankruptcy Abuse Prevention and Consumer Protection Act and the 2003 UK Treasury Select Committee's report require lenders to collect a minimum payment of at least the interest accrued each month, so people are protected from the effects of compounding interest.
Abstract: About three quarters of credit card accounts attract interest charges. In the US, credit card debt is $951.7 billion of a total of $2,539.7 billion of consumer credit. In the UK, credit card debt is £55.1 billion of £174.4 billion of consumer credit. The 2005 US Bankruptcy Abuse Prevention and Consumer Protection Act and the 2003 UK Treasury Select Committee's report require lenders to collect a minimum payment of at least the interest accrued each month. Thus people are protected from the effects of compounding interest. But including minimum payment information has an unintended negative effect, because minimum payments act as psychological anchors.
TL;DR: In this paper, the informational content of prime and subprime credit scores in the consumer credit market was assessed using a unique dataset matched at the individual level from two administrative sources, and they found that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans.
Abstract: Using a unique dataset matched at the individual level from two administrative sources, we examine household choices between liabilities and assess the informational content of prime and subprime credit scores in the consumer credit market. First, more specifically, we assess consumers' effectiveness at prioritizing use of their lowest-cost credit option. We find that most borrowers from one payday lender who also have a credit card from a major credit card issuer have substantial credit card liquidity on the days they take out their payday loans. This is costly because payday loans have annualized interest rates of at least several hundred percent, though perhaps partly explained by the fact that borrowers have experienced substantial declines in credit card liquidity in the year leading up to the payday loan. Second, we show that FICO scores and Teletrack scores have independent information and are specialized for the types of lending where they are used. Teletrack scores have eight times the predictive power for payday loan default as FICO scores. We also show that prime lenders should value information about their borrowers' subprime activity. Taking out a payday loan predicts nearly a doubling in the probability of serious credit card delinquency over the next year.
TL;DR: In this article, the authors examine the effectiveness of a number of proposed regulatory solutions of CRAs and find that CRAs are more prone to inflate ratings when there is a larger fraction of naive investors in the market who take ratings at face value, or when CRA expected reputation costs are lower.
Abstract: The spectacular failure of top-rated structured finance products has brought renewed attention to the conflicts of interest of Credit Rating Agencies (CRAs). We model both the CRA conflict of understating credit risk to attract more business, and the issuer conflict of purchasing only the most favorable ratings (issuer shopping), and examine the effectiveness of a number of proposed regulatory solutions of CRAs. We find that CRAs are more prone to inflate ratings when there is a larger fraction of naive investors in the market who take ratings at face value, or when CRA expected reputation costs are lower. To the extent that in booms the fraction of naive investors is higher, and the reputation risk for CRAs of getting caught understating credit risk is lower, our model predicts that CRAs are more likely to understate credit risk in booms than in recessions. We also show that, due to issuer shopping, competition among CRAs in a duopoly is less efficient (conditional on the same equilibrium CRA rating policy) than having a monopoly CRA, in terms of both total ex-ante surplus and investor surplus. Allowing tranching decreases total surplus further. We argue that regulatory intervention requiring upfront payments for rating services (before CRAs propose a rating to the issuer) combined with mandatory disclosure of any rating produced by CRAs can substantially mitigate the conflicts of interest of both CRAs and issuers.
TL;DR: This paper examined three factors that are associated with college students' credit card indebtedness and found that college students with a tendency towards compulsive buying are more likely and those with greater social support are less likely to hold credit card debts.
Abstract: This research examines three factors that are associated with college students' credit card indebtedness. Using survey data, we find that college students' buying patterns and social networks affect their credit card indebtedness. Specifically, students with a tendency towards compulsive buying are more likely and those with greater social support are less likely to hold credit card debts. Depth interview data further illustrate the contexts and causes of overusing credit cards as well as solutions for their debt problem. This research sheds light on reasons why college students fall into credit card debt and suggests strategies for helping them use credit cards wisely.
[...]
TL;DR: This paper found that revolvers are substantially less likely to incur credit card charges and substantially more likely to use a debit card, conditional on several proxies for transaction demand and tastes, and that debit is becoming a stronger substitute for credit over time.
Abstract: Empirical consumer payment price sensitivity has implications for theory, optimal regulation of payment card networks, and business strategy. A critical margin is the price of a credit card charge. A revolver who did not pay her most recent balance in full pays interest; other credit card users do not. I find that revolvers are substantially less likely to incur credit card charges and substantially more likely to use a debit card, conditional on several proxies for transaction demand and tastes. Debit use also increases with credit limit constraints and decreases with credit card possession. Additional results suggest that debit is becoming a stronger substitute for credit over time.
Posted Content•
TL;DR: In this paper, the authors measure the total explicit and implicit costs that consumers pay across all of their bank and credit card accounts, and find that credit card interest is the largest component of total costs.
Abstract: We use novel administrative data containing every checking and credit card account transaction made by 917 consumers over two years to measure the total explicit and implicit costs that consumers pay across all of their bank and credit card accounts. In our sample the median household pays $43 in total bank and credit card account costs per month and the 90th percentile pays $257 per month ($3084 per year). For most consumers who pay economically significant costs, credit card interest is the largest component of total costs. For many consumers a large share of costs could be avoided relatively easily: the median panelist could avoid 60 percent of all credit card interest charges, overdraft fees, overlimit and late fees by using different cards at the point of sale, reallocating debt from high-interest to low-interest credit cards, or repaying credit card debt with available checking balances.
Journal Article•
TL;DR: In this paper, the authors review the current methodology and measures used in credit scoring and then look at the models that can be used to address these new challenges and develop models that show how they will change the operating decisions used in consumer lending and how their need for stress testing requires the development of new models to assess the credit risk of portfolios of consumer loans rather than a models of the credit risks of individual loans.
Abstract: The use of credit scoring - the quantitative and statistical techniques to assess the credit risks involved in lending to consumers - has been one of the most successful if unsung applications of mathematics in business for the last fifty years. Now with lenders changing their objectives from minimising defaults to maximising profits, the saturation of the consumer credit market allowing borrowers to be more discriminating in their choice of which loans, mortgages and credit cards to use, and the Basel Accord banking regulations raising the profile of credit scoring within banks there are a number of challenges that require new models that use credit scores as inputs and extensions of the ideas in credit scoring. This book reviews the current methodology and measures used in credit scoring and then looks at the models that can be used to address these new challenges. The first chapter describes what a credit score is and how a scorecard is built which gives credit scores and models how the score is used in the lending decision. The second chapter describes the different ways the quality of a scorecard can be measured and points out how some of these measure the discrimination of the score, some the probability prediction of the score, and some the categorical predictions that are made using the score. The remaining three chapters address how to use risk and response scoring to model the new problems in consumer lending. Chapter three looks at models that assist in deciding how to vary the loan terms made to different potential borrowers depending on their individual characteristics. Risk based pricing is the most common approach being introduced. Chapter four describes how one can use Markov chains and survival analysis to model the dynamics of a borrower's repayment and ordering behaviour . These models allow one to make decisions that maximise the profitability of the borrower to the lender and can be considered as part of a customer relationship management strategy. The last chapter looks at how the new banking regulations in the Basel Accord apply to consumer lending. It develops models that show how they will change the operating decisions used in consumer lending and how their need for stress testing requires the development of new models to assess the credit risk of portfolios of consumer loans rather than a models of the credit risks of individual loans
TL;DR: In this article, the impact of lenders' information sharing on credit market performance using contract-level data from a major U.S. credit bureau that serves the equipment finance industry was studied.
Abstract: We study the impact of lenders' information sharing on credit market performance using contract-level data from a major U.S. credit bureau that serves the equipment finance industry. The staggered entry of lenders into the bureau, the richness of the data set (28,000 loans and leases extended to roughly 4,000 businesses), and the small and medium size of borrowing firms offer a suitable natural experiment to identify the effect of lenders' improved access to information. In line with the predictions of Pagano and Jappelli (1993) and Padilla and Pagano (1997, 2000), we find that information sharing reduces firms' delinquencies on loans and leases, and that this effect is more pronouned for informationally opaque and risky businesses. The results also document that information sharing induces creditors to grant smaller and shorter-term loans and to demand more guarantees. Thus, information sharing appears to improve firms' repayment performance but not necessarily leads financiers to loosen their lending standards.
TL;DR: In this paper, the authors provide the first systematic empirical analysis of how asymmetric information and competition in the credit market affect voluntary information sharing between lenders, and they study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones.
Abstract: We provide the first systematic empirical analysis of how asymmetric information and competition in the credit market affect voluntary information sharing between lenders. We study an experimental credit market in which information sharing can help lenders to distinguish good borrowers from bad ones. Lenders may, however, also lose market power by sharing information with competitors. Our results suggest that asymmetric information in the credit market increases the frequency of information sharing between lenders significantly. Stronger competition between lenders reduces information sharing. In credit markets where lenders may fail to coordinate on sharing information, the degree of information asymmetry, rather than lender competition, drives actual information sharing behavior.
TL;DR: In this paper, the repeated principal-agent problem was studied in the context of credit rating agencies and it was shown that there exists an approval scheme which induces credit rating agents to assign correct ratings.
Abstract: Financial regulators recognize certain credit rating agencies for regulatory purposes. However, it is often argued that credit rating agencies have an incentive to assign inflated ratings. This paper studies a repeated principal-agent problem in which a regulator approves credit rating agencies. Credit rating agencies may collude to assign inflated ratings. Yet we show that there exists an approval scheme which induces credit rating agencies to assign correct ratings.
TL;DR: This article argued that credit default swaps did not cause the dramatic events of the credit crisis, and that the over-the-counter CDS market worked well during much of the first year of the crisis.
Abstract: Many observers have argued that credit default swaps contributed significantly to the credit crisis. Of particular concern to these observers are that credit default swaps trade in the largely unregulated over-the-counter market as bilateral contracts involving counter-party risk and that they facilitate speculation involving negative views of a firm’s financial strength. Some observers have suggested that credit default swaps would not have made the crisis worse had they been traded on exchanges. I conclude that credit default swaps did not cause the dramatic events of the credit crisis, that the over-the-counter credit default swaps market worked well during much of the first year of the credit crisis, and that exchange trading has both advantages and costs compared to over-the-counter trading. Though I argue that eliminating over-the-counter trading of credit default swaps could reduce social welfare, I also recognize that much research is needed to understand better and quantify the social gains and costs of derivatives in general and credit default swaps in particular.
Posted Content•
TL;DR: In this article, the authors investigated factors influencing convenience use of credit cards and found that consumers were more likely to believe that using credit was bad, had longer financial planning horizons, did more shopping for credit, were older, had a college education, and had higher income.
Abstract: Utilizing the theory of planned behavior, factors influencing convenience use of credit cards were investigated. The analysis was prepared using data from 3,476 households in the 2004 Survey of Consumer Finances. Results from logistic regression indicated that convenience users of credit cards: were more likely to believe that using credit was bad, had longer financial planning horizons, did more shopping for credit, were older, had a college education, and had higher income. Respondents were less likely to be convenience users of credit cards if they: had no tolerance for risk, were late with payments, thought it was all right to use credit for vacations, and sought credit advice from other people and the media instead of doing their own search.
TL;DR: In this article, the authors report on a study in which they examined various issues related to credit scoring, including how credit scoring has affected the availability and affordability of credit, the relationship between credit scores and loan performance and how these relationships vary for the population groups protected under the Equal Credit Opportunity Act.
Abstract: The Fair and Accurate Credit Transaction Act of 2003 (the FACT Act) directed several federal agencies to conduct studies related to the credit reporting industry. A primary concern was the accuracy and fairness of the credit reporting and scoring systems. In this article, Federal Reserve System Board economists report on a study in which they examined various issues related to credit scoring, including how credit scoring has affected the availability and affordability of credit. In a responding commentary, Calvin Bradford notes flaws and deficiencies in the Federal Reserve System study. ********** In recent decades, consumer credit markets in the United States have become increasingly national in scope and credit has been extended to a broader spectrum of consumers. The development and use of credit scores has greatly facilitated these trends. Credit scoring is a statistical technology that quantifies the credit risk posed by a prospective or current borrower. Credit scores seek to rank order individuals by their credit risk so that those with poorer scores are expected to perform worse on their credit obligations than those with better scores. Credit scoring is widely used to evaluate applications for credit, identify prospective borrowers and manage existing credit accounts. It is also used to facilitate decision making in other areas, including insurance, housing, and employment. The large savings in cost and time that have accompanied the use of credit scoring are believed to have increased access to credit, promoted competition and improved market efficiency. In response to Section 215 of the Fair and Accurate Credit Transaction Act of 2003 (the FACT Act), (1) the Federal Reserve prepared a study on how credit scoring has affected the availability and affordability of credit, the relationship between credit scores and loan performance and how these relationships vary for the population groups protected under the Equal Credit Opportunity Act (ECOA). The study also addressed the extent to which the consideration of certain factors included in credit scoring models might have a negative or differential effect on populations protected under the ECOA and the extent to which alternative factors could be used in credit scoring to achieve comparable results with a less negative effect on protected populations. This article presents a summary of the study. BACKGROUND OF THE STUDY Largely because of a lack of data linking credit scores to race, ethnicity and other pertinent demographic information about individuals, little research has been conducted on the potential effects of credit scoring on minorities or other demographic groups. With the exception of dates of birth, the credit records maintained by consumer-reporting agencies, which serve as the basis for most credit scoring models, do not include any personal demographic information. (2) Moreover, federal law generally prohibits the collection of such data on applications for nonmortgage credit. Even in the context of mortgage credit, for which some creditors are required to collect information on race, ethnicity and sex, little information is publicly available about how these personal demographics relate to credit scores. The Board's study was prepared using two types of information. The first type was gathered from public comments submitted for the study and from a review of previous research, studies and surveys. The second type was collected from the unique research conducted by the staff of the Federal Reserve Board specifically for this study. Regarding the second approach, the Board's staff created a database that, for the first time, combined information about personal demographics collected by the Social Security Administration (SSA) with a large, nationally representative sample of individuals' credit records. The sample comprised the full credit records of more than 300,000 anonymous individuals drawn in June 2003 and updated in December 2004 by TransUnion LLC (TransUnion), one of the three national credit reporting agencies. …
TL;DR: In this article, the authors investigated the effects of agency and information asymmetry issues embedded in structural form credit models on bank credit risk evaluation, using American bank data from 2001 to 2005.
Abstract: This work investigates the effects of agency and information asymmetry issues embedded in structural form credit models on bank credit risk evaluation, using American bank data from 2001 to 2005. Findings show that both the agency problem and information asymmetry significantly cause deviations in the credit risk evaluation of structural form models from agency ratings. Five independent factors explain a deviation of 42.6–78.3% and should be incorporated into future credit risk modeling. Additionally, both the effects of information asymmetry and debt-equity agency positively relate to the deviation while that of management-equity agency relates to it negatively.
Posted Content•
TL;DR: A recent white paper by the Council of Institutional Investors as discussed by the authors provides an institutional investor perspective of the pros and cons of several proposals for redesigning credit rating agency regulation, focusing on two primary importance - oversight and accountability - and offers specific recommendations in both areas.
Abstract: This white paper was commissioned by the Council of Institutional Investors for the purpose of educating its members, policymakers, and the general public about important credit rating agency regulation proposals and their potential impact on investors. It offers an institutional investor perspective of the pros and cons of several proposals for redesigning credit rating agency regulation. It focuses on two areas of primary importance - oversight and accountability - and offers specific recommendations in both areas. First, Congress should create a new Credit Rating Agency Oversight Board (CRAOB) with the power to regulate rating agency practices, including disclosure, conflicts of interest, and rating methodologies, as well as the ability to coordinate the reduction of reliance on ratings. Alternatively, Congress could enhance the authority of the Securities and Exchange Commission (SEC) to grant it similar power to oversee the rating business. Second, Congress should eliminate the effective exemption of rating agencies from liability and make rating agencies more accountable by treating them the same as banks, accountants, and lawyers. As financial gatekeepers with little incentive to “get it right,” credit rating agencies pose a systemic risk. Creating a rating agency oversight board and strengthening the accountability of rating agencies is thus consistent with the broader push by U.S. policymakers for greater systemic risk oversight. Over the long term, other measures for assessing credit risk may become more acceptable and accessible to regulators and investors. Meanwhile, a more powerful overseer and broader accountability would help reposition credit rating agencies as true information intermediaries.
TL;DR: In this article, the authors used an endogenous regime switching model and data from 460 commercial banks in 72 countries, excluding the United States, for the period 1998-2003, and found that the observed differences between solicited and unsolicited ratings can be explained by both the solicitation status and financial profile of the banks.
Abstract: Would the credit ratings of unsolicited banks be higher if they were solicited? Alternatively, would the credit ratings of solicited banks would be lower if they were unsolicited? To answer these questions, we use an endogenous regime-switching model and data from 460 commercial banks in 72 countries, excluding the United States, for the period 1998–2003. The answer to both questions is yes. Our results show that the observed differences between solicited and unsolicited ratings can be explained by both the solicitation status and financial profile of the banks. This finding is a new contribution to the literature.