Basel Ii, Sovereign Ratings and Transfer Risk External Versus Internal Ratings

33 Pages Posted: 7 May 2003

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

Geert C.M.W. Embrechts

Rabobank International - Structured Trade and Commodity Finance

Date Written: March 6, 2003

Abstract

Basel II puts great emphasis on external ratings, including from rating agencies, to quantify credit risks. It also allows financial institutions to use internal risk ratings. This is also the case for international lending, but following recent emerging markets' crises, the quality of sovereign ratings has received some criticism. At the same time, little is known about the quality of internal country risk ratings. Using data from a major international bank, we assess the consistency between internal and external country ratings and the behavior of the two sets of ratings. We find that internal and external ratings are driven by similar factors and both underestimate "event risks" but external ratings are somewhat slower in adjusting to a financial crisis than internal ones.

JEL Classification: G20, G21

Suggested Citation

Claessens, Stijn and Embrechts, Geert C.M.W., Basel Ii, Sovereign Ratings and Transfer Risk External Versus Internal Ratings (March 6, 2003). Available at SSRN: https://ssrn.com/abstract=386480 or http://dx.doi.org/10.2139/ssrn.386480

Stijn Claessens (Contact Author)

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Geert C.M.W. Embrechts

Rabobank International - Structured Trade and Commodity Finance ( email )

P.O.Box 17100
Utrecht 3500 HG
Netherlands
+31 30 2164104 (Phone)
+31 30 2162964 (Fax)

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