Corporate Credit Rating Systems

Key points / questions answered:

• Which rating models are appropriate for regulations such as Basel III or IFRS 9?
• How to gather, structure and maintain the data needed for credit ratings of corporate entities?
• How to handle data availability and data quality challenges in practice?
• Which statistical tools and rating model development practices are robust and proven?
• Which innovative methods might help the bank to obtain forward-looking risk assessments?
• How to create a rating system that is useful for risk-adjusted pricing in long-term corporate customer-bank relationships?

The purpose of this seminar is to introduce you to the key methodologies to design, develop, calibrate and validate credit rating systems for corporate customers.
We start with an overview and discussion of the three main types of credit rating systems: the Early Warning systems, the Long-term Corporate (issuer) Ratings and 'Master Scale'-based Rating systems. Particular focus is put on the uses and misuses of each of the three system types, including their applicability to meet regulatory requirements, such as Basel III or IFRS 9, and their appropriateness to address business-related objectives, such as risk-adjusted pricing or operational risk management.
We then take a closer look at the 'Master Scale'-based Rating systems. 'Master scales' allocate a non-overlapping range of probabilities of default (PD) that are stable over time to each rating class. The rating methods for such systems need to produce accurate projections of the 1-year PD based on actually observed defaults.
After this, we turn to the Early Warning systems, which help the bank to identify reliably upcoming defaults or substantial credit risk increases of specific corporate customers on an ongoing basis.
Finally, we look at the Long-term Corporate (issuer) Ratings which express risk in relative rank order (i.e. they are ordinal measures of credit risk) and are not predictive of a specific frequency of default.
Throughout the entire course, we revisit the topic of IFRS 9 multiple times, highlighting the best practices in applying the different types rating systems to comply with this new regulation. Covered topics include the development of IFRS 9 staging criteria, the estimation of lifetime PD and the calculation of impairment provisions.