The Role of Non-Financial Factors in Internal Credit Ratings
31 Pages Posted: 22 Mar 2002 Last revised: 2 Sep 2009
Date Written: January 14, 2004
Internal credit ratings are expected to gain in importance because of their potential use for determining regulatory capital adequacy and banks' increasing focus on the risk-return profile in commercial lending. Whereas the eligibility of financial factors as inputs for internal credit ratings is widely accepted, the role of non-financial factors remains ambiguous. Analyzing credit file data from four major German banks, we find evidence that the combined use of financial and non-financial factors leads to a more accurate prediction of future default events than the single use of each of these factors.
Keywords: Credit risk, Credit ratings, Debt default, Probit analysis
JEL Classification: G21
Suggested Citation: Suggested Citation