Internal Rating Based Models: Do They Matter for Bank Profit Margins?

58 Pages Posted: 28 Jun 2019 Last revised: 30 Jun 2019

See all articles by Danilo V. Mascia

Danilo V. Mascia

University of Leeds

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Francesco Vallascas

University of Leeds - Division of Accounting and Finance

Date Written: June 26, 2019

Abstract

The net interest margin (NIM) from the traditional intermediation function is pivotal for bank profitability and solvency. Using a unique cross-country sample on bank internal rating based (IRB) models, we find that the NIM increases when banks measure a larger share of their credit risk via IRB models. This result does not reflect greater credit risk-taking by IRB banks. Instead, IRB models improve credit risk-management, and this improvement is accompanied by lower funding costs and higher investment in interest earning assets. Ultimately, IRB models improve the risk-return trade-off of a bank’s traditional intermediation function as compared to cruder credit-risk measurement systems.

Keywords: Net-Interest Margin, Internal Risk Models, Bank Regulation

JEL Classification: G21, G28

Suggested Citation

Mascia, Danilo V. and Keasey, Kevin and Vallascas, Francesco, Internal Rating Based Models: Do They Matter for Bank Profit Margins? (June 26, 2019). Available at SSRN: https://ssrn.com/abstract=3410461 or http://dx.doi.org/10.2139/ssrn.3410461

Danilo V. Mascia (Contact Author)

University of Leeds ( email )

Leeds, LS2 9JT
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

Francesco Vallascas

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
17
Abstract Views
146
PlumX Metrics