This paper argues that credit ratings have contributed to the current financial crisis. In United States, the previous “reputational model” as well as the current proposals aimed at reducing reliance on rating agencies, enhancing competition and increasing transparency is not sufficient to improve the integrity of rating agencies. This paper suggests that imposing stricter liability on rating agencies is necessary. The proposal to eliminate the exemption of NRSROs under Section 11 of the Securities Act is necessary but not sufficient for holding rating agencies accountable. The first amendment defense always shields rating agencies from legal liability, while the absence of a common standard make it hard to impose liability for negligent ratings. Finally, this paper suggests that the courts should not award the rating agencies First Amendment protection and consider the distinguished characteristics of rating agencies, when examining the professional liability of the agencies.

This paper argues that credit ratings have contributed to the current financial crisis. In United States, the previous “reputational model” as well as the current proposals aimed at reducing reliance on rating agencies, enhancing competition and increasing transparency is not sufficient to improve the integrity of rating agencies. This paper suggests that imposing stricter liability on rating agencies is necessary. The proposal to eliminate the exemption of NRSROs under Section 11 of the Securities Act is necessary but not sufficient for holding rating agencies accountable. The first amendment defense always shields rating agencies from legal liability, while the absence of a common standard make it hard to impose liability for negligent ratings. Finally, this paper suggests that the courts should not award the rating agencies First Amendment protection and consider the distinguished characteristics of rating agencies, when examining the professional liability of the agencies.

University of Macau / Faculty of Law

Credit derivatives, some of the most significant developments is the financial industry, have experienced significant growth recently. The objective of this study is to examine whether the use of credit derivatives, either buying or selling, has an effect on banks loan pricing behaviour. Minton et al. (2009) propose that the net buyers of credit protection save capital and thus should be able to make loans at rates that are below the rates offered by competitors who do not utilize credit derivatives. In addition, Hirtle (2009) investigates the relationship between credit derivatives and their effects on bank lending activities. She does not find a strong association between the use of credit derivative and the supply of loans and proposes that banks are using credit derivatives mainly to provide longer maturity and lower spread loans rather than to increase the volume of loans. In contrast to previous studies, our study investigates the relation between loan prices, measured by the interest and fee income per dollar of loans, and the use of credit derivatives at BHCs. We propose that if BHCs use credit derivatives to hedge credit exposures, they would charge a lower loan rate to the borrowers since CDs enable banks to transfer the credit risk away from the lenders. However, if credit derivatives are used for purposes other than managing credit exposure, these instruments might not have any impact on loan pricing. Another goal of our study is to investigate the relationship between loan prices and the use of credit derivatives for trading purpose. We expect that during the years when BHCs are net sellers of credit derivatives, they take these positions because they have good quality loans and they are willing to take additional risk. In this case, they would report lower income per dollar of loans. However, if banks sell CDs as part of their speculative strategy, their use of credit derivatives might not have any impact on loan prices. Thus, banks would charge a rate that is similar to other banks with the same level of risk. Another goal of our study is to find, for both users and non-users of credit derivatives, how the interest and fee income generated by the BHCs is affected by the risk of default of their clients. We expect that as the risk of default increases, the prices on loans would increase as well. Banks take additional risk in exchange for higher return. Our final goal of this study is to investigate whether the use of CDs affects the supply of funds or loan rates differently for different types of loans banks hold in their portfolios. Our findings suggest that the loan prices of users of CDs are significantly less than the loan prices of nonusers. This finding may suggest that users are more efficient, competitive and diversified than nonusers and thus can afford to charge a lower rate to their clients. The result may also suggest that BHCs that are using CDs generally have lower risk loan portfolios and these portfolios are generating lower income per dollar of assets. Among the users group, we observe that as the volume of CDs purchased increases the prices of loans also increase. This suggests additional usage of CDs allows users to accept risky loans that they would not accept in the absence of CDs. They are initiating these high-risk loans to generate higher interest and fee income and at the same time they are using more CDs to hedge these risky loans. Our study also finds a significant and positive relationship between the risk of default and BHCs loan prices. Our study further investigates the users of credit derivatives during the years when these banks use CDs and the years when they do not use CDs. We find that the loan prices are marginally lower for the years when CDs are used. In particular, we find a significant decrease in prices during the years when these banks are sellers of CDs. However, we do not find any significant impact on loan prices during the years when they buy CDs. This result suggests that CD-active BHCs that buy CD protection are doing so to reduce some excessive risk they have taken without demanding a high rate to compensate for this risk. Finally, we find that the years when BHCs report both CDs bought and CDs sold, they charge a loan price that is similar to the years when these banks do not report any position in the CDs market. Perhaps the BHCs that report simultaneously CDs bought and CDs sold are selling CDs to generate income and hedging their positions through buying offsetting positions. Our analysis also suggests that the impact of the use of derivatives varies depending on whether the loans are real estate, consumer, commercial and industrial, agricultural, or foreign loans.

None

The wellness of credit risk has great influence on the Value of Mortage-Backed Securities (MBS), but there isn¡¦t any valuator to supervise and to estimate these securities-issued institutions in Taiwan. For earning the trust of the masses, these institutions must have great abilities to control credit risk in an acceptable degree, and then the people will be willing to invest in these MBS. This research makes use of data totaling 20,576 cases (17,425 normal cases and 3,151 default cases) from a certain domestic bank, Bank P, and constructs the Logistic Regression Model to steer the substantial evidence research. With the right prediction of 96.7% in normal, 85.4% in default, and 95% in whole, we find that we can use the borrower¡¦s age, occupation, the object of collateral, the use of collateral, the loan purpose, the year of loan, the line of credit, the category of interest, the interest rate, the source of case and the branch office as key factors for credit risk appraisal of reference provided to banks. In this study, we will determine whether interest rate is the key factor for default, followed by occupation. The other two factors, the category of interest and the source of case, which are not popularly talked about in related studies, are confirmed as the remarkable influence factors for credit risk. The other important discovery is that the influence of the loan condition and the specialities of the collateral have greater impact on credit risk than the personality of the borrower. This research provides some reference for financial institutions on credit evaluation, and makes up a good model for credit control. For previously issued MBS, this research also provides some academic basis for future adaptation.

none

The New Basel Capital Accord (Basel II) provides added emphasis to the development of portfolio credit risk models. An important regulatory change in Basel II is the differentiated treatment in measuring capital requirements for the corporate exposures and retail exposures. Basel II allows agricultural loans to be categorized and treated as the retail exposures. However, portfolio credit risk model for agricultural loans is still in their infancy. Most portfolio credit risk models being used have been developed for corporate exposures, and are not generally applicable to agricultural loan portfolio. The objective of this study is to develop a credit risk model for agricultural loan portfolios. The model developed in this study reflects characteristics of the agricultural sector, loans and borrowers and designed to be consistent with Basel II, including consideration given to forecasting accuracy and model applicability. This study conceptualizes a theory of loan default for farm borrowers. A theoretical model is developed based on the default theory with several assumptions to simplify the model. An annual default model is specified using FDIC state level data over the 1985 to 2003. Five state models covering Iowa, Illinois, Indiana, Kansas, and Nebraska areestimated as a logistic function. Explanatory variables for the model are a three-year moving average of net cash income per acre from crops, net cash income per cwt from livestock, government payments per acre, the unemployment rate, and a trend. Net cash income generated by state reflects the five major commodities: corn, soybeans, wheat, fed cattle, and hogs. A simulation model is developed to generate the stochastic default rates by state over the 2004 to 2007 period, providing the probability of default and the loan loss distribution in a pro forma context that facilitates proactive decision making. The model also generates expected loan loss, VaR, and capital requirements. This study suggests two key conclusions helpful to future credit risk modeling efforts for agricultural loan portfolios: (1) net cash income is a significant leading indicator to default, and (2) the credit risk model should be segmented by commodity and geographical location.

After the fifteen years over banking, the financial tsunami reveals that Taiwan banking industry has been in a predicament. In the recent ten years, due to being impacted by the risks of the enterprise finance, the retailer finance, the overseas investment, and even the whole economic system, the banks in Taiwan not only have lost seriously, but also been managed more hardly. How to find out a profit model based on the security, the benefit, and the public welfare principles is the critical issue. The traditional loan to small and medium-sized enterprises that brings the reasonable interest gains and the overall financial intercourse spin-off benefits has become the focal point once again. In order to create the real profit, it is important to control credit risks and the cost of operation. At this time, the government implements the new Basel¢º supervisory standard with the purpose of encouraging the banks to adopt the IRB to estimate the loan credit risks. It has to meet various the lowest operational requirements and statistical analysis patterns as well as should be practiced in the banking loan business definitely. Consequently, to build an internal loan credit scoring system with the scientific method is a key point. The research aims to produce the credit scoring model using a series of logical processes, which derived from the 2,517 small business loan samples from May, 2005 to May, 2006 of one Taiwan commercial bank. It adopted WOE model to evaluate a variety of variables, and sift out the 11 representative and the statistical items. Then, following IRB standard, Logistics Regression and related statistic analysis techniques established the credit estimating method and the linked addition scoring card. Finally, the investigation employed the violation rate distribution, Lorenz¡¦s Curve, K-S Test and Log Odds to make sure the rationality and reliability. Based on this model, there are eight essential variables that affects the verification of the loan to small businesses, including customer present loan situation, the urgent of increasing the loan, repayments custom, and so on, which conform to the banking practical know-how. Therefore, the model could assist the banking employees to calculate the loan credit grades efficiently and further make the accurate judgment.

Thesis (Ph. D.)--University of Chicago, Dept. of Economics, August 2001. / Includes bibliographical references. Also available on the Internet.