The Synergy of Rating Agencies’ Efforts: Russian Experience

Abstract

We examine the synergy of the credit rating agencies’ efforts. This question is important not only for regulators, but also for commercial banks if the implementation of the internal ratings and the advanced Basel Approach are discussed. We consider Russian commercial banks as a good example where proposal methods might be used. Firstly, a literature overview was supplemented with an analysis of the activities of rating agencies in Russia. Secondly, we discussed the methods and algorithms of the comparison of rating scales. The optimization task was formulated and the system of rating maps onto the basic scale was obtained. As a result we obtained the possibility of a comparison of different agencies’ ratings. We discussed not only the distance method, but also an econometric approach. The scheme of correspondence for Russian banks is presented and discussed. The third part of the paper presents the results of econometric modeling of the international agencies’ ratings, as well as the probability of default models for Russian banks. The models were obtained from previous papers by the author, but complex discussion and synergy of their systematic exploration were this paper’s achievement. We consider these problems using the example of financial institutions. We discuss the system of models and their implementation for practical applications towards risk management tasks, including those which are based on public information and a remote estimation of ratings. We expect the use of such a systemic approach to risk management in commercial banks as well as in regulatory borders.

The work is partially supported by the International Laboratory of Quantitative Finance, NRU HSE, RF government grant, ag. 14.A12.31.0007.