Ratings Versus Market-Based Measures of Default Risk of East Asian Banks
39 Pages Posted: 21 Aug 2007
Date Written: August 16, 2007
This paper assesses whether agency ratings and market-based default risk measures are consistent for East Asian banks during the period from 1996 to 2006. While the market-based measures are broadly consistent with the credit rating assessments for the banks in the developed economies, the discrepancy between ratings and the market-based measures for the East Asian banks are significant. The credit ratings had been adjusted slowly for the East Asian banks during the onset of the Asian financial crisis. The relatively higher default risk implied by ratings during the post-crisis period is partly due to the conservatism of rating agencies and the unsolicited ratings. The discrepancy still exists after taking these two factors into account. From a prospective of the banking policies, the use of agency-based or market-based measures for calculating capital requirements of exposures to banks and deposit insurance premiums in the East Asian economies could raise an issue of systematic differences between the two measures.
Keywords: Asian financial crisis, credit rating agencies, credit risk models
JEL Classification: G13, G14, G21, G32
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