Corporate Loans, Banks’ Internal Risk Estimates and Central Bank Collateral: Evidence from the Euro Area

40 Pages Posted: 2 Aug 2021

See all articles by Alessandro Calza

Alessandro Calza

European Central Bank (ECB)

Julius-Benjamin Hey

Independent

Alessandro Parrini

European Central Bank (ECB)

Stephan Sauer

European Central Bank (ECB)

Date Written: July, 2021

Abstract

We use a unique dataset of ratings for euro area corporate loans from commercial banks’ internal rating-based (IRBs) systems and central banks’ in-house credit assessment systems (ICASs) to investigate whether banks’ IRB ratings underestimate the credit risk of their corporate loan portfolios when the latter are used as collateral in the Eurosystem’s monetary policy operations. We are able to identify systematic risk underestimation by comparing the IRB ratings with those produced for the same borrowers by the ICASs. Our results show that while they are on average more conservative than ICASs for the entire population of rated corporate loans, IRBs are significantly less conservative than ICASs for those loans that are actually used as Eurosystem collateral, particularly for large loans. The less conservative estimates of risk by IRBs relative to ICASs can be partly explained by banks’ liquidity constraints, but not by their degree of capitalisation. Overall, our findings suggest the existence of a collateral-related channel through which the use of IRB ratings may influence the internal estimation of risk by banks.

JEL Classification: G21, G28

Suggested Citation

Calza, Alessandro and Hey, Julius-Benjamin and Parrini, Alessandro and Sauer, Stephan, Corporate Loans, Banks’ Internal Risk Estimates and Central Bank Collateral: Evidence from the Euro Area (July, 2021). ECB Working Paper No. 2021/2579, Available at SSRN: https://ssrn.com/abstract=3896788 or http://dx.doi.org/10.2139/ssrn.3896788

Alessandro Calza (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
0049 69 13440 (Phone)
0044 69 1344 6000 (Fax)

Julius-Benjamin Hey

Independent ( email )

Alessandro Parrini

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Stephan Sauer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

HOME PAGE: http://www.ecb.int

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