Myth and Reality of Discriminatory Power for Rating Systems

Wilmott Magazine, 2005, pp. 2-6

12 Pages Posted: 10 Nov 2013

See all articles by Stefan Blochwitz

Stefan Blochwitz

Deutsche Bundesbank

Alfred Hamerle

University of Regensburg - Faculty of Business, Economics & Information Systems

Stefan Hohl

Bank for International Settlements (BIS)

Robert Rauhmeier

KfW Bankengruppe

Daniel Roesch

University of Regensburg

Date Written: July 27, 2004

Abstract

Under the Revised International Capital Framework, debtors’ credit ratings and probabilities of default in credit portfolios have a key role in determining minimum regulatory capital re-quirements. To measure discriminatory power of rating systems, methods such as the area under a ROC curve, the Accuracy Ratio and PowerStat are often used both in academic stud-ies and in practice. This paper shows that these measures need to be interpreted with caution since their values hinge crucially on the characteristics of the portfolio under consideration and not just on the quality of the rating system.

Suggested Citation

Blochwitz, Stefan and Hamerle, Alfred and Hohl, Stefan and Rauhmeier, Robert and Roesch, Daniel, Myth and Reality of Discriminatory Power for Rating Systems (July 27, 2004). Wilmott Magazine, 2005, pp. 2-6, Available at SSRN: https://ssrn.com/abstract=2350369

Stefan Blochwitz

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Alfred Hamerle

University of Regensburg - Faculty of Business, Economics & Information Systems ( email )

Universitstrasse 31
Regensberg D-93053
Germany

Stefan Hohl

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Robert Rauhmeier

KfW Bankengruppe ( email )

Palmengartenstraße 5-9
Frankfurt a. M., 60325
Germany

Daniel Roesch (Contact Author)

University of Regensburg ( email )

Chair of Statistics and Risk Management
Faculty of Business, Economics and BIS
Regensburg, 93040
Germany

HOME PAGE: http://www-risk.ur.de/

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