How We Can Check Credit Worthiness Of Banks

1237 words - 5 pages

1. Introduction
2. Definition Contents

3. Credit rationing methodologies
3.1: Agency methodologies
3.2: Table of creditworthiness methodologies
3.3: Loss concept
4. Creditworthiness process
5. Morningstar Global Bank Credit Rating Methodology
6. Stages of creditworthiness

1. Introduction

Credit rating agencies (CRAs) formulate and issue credit ratings for both companies (debt issuers) and individual debt instruments. Issuer’ rating represents a forward-looking assessment of the ability and willingness of an issuer, such as a corporation or state or city government, to meet its financial obligations in full and on time. Therefore, ...view middle of the document...

However, less liquid banks are found to have higher ratings and the resultsshow no strong relationship between banks’ credit ratings and each of asset quality, capital adequacy ratios and leverage. So he credit rationing of banks should be strong as well as better.

2. Definition of 'Credit Worthiness'

An assessment of the likelihood that a borrower will default on their debt obligations. It is based upon factors, such as their history of repayment and their credit score. Lending institutions also consider the availability of assets and extent of liabilities to determine the probability of default.
Know we are going to explain creditworthiness of banks in different cases.
3. Rating methodologies for banks
3.1 Agency methodologies
This section discusses sequentially the rating methodologies of the three major rating agencies. The discussion is condensed in Table 1.

3.2:Creditworthiness methodologies.

3.3:Loss concept
As earlier noted, an important aspect of any credit risk rating system is the loss concept used to differentiate the riskiness of different credit exposures, ie whether the ratings are one- or two-dimensional in form and whether they focus primarily on PD, LGD, EL or all three credit risk measures.
All 10 of the surveyed Australian banks utilise two-dimensional rating systems. In rating their credit exposures, each of these banks determines a separate customer-level PD rating, a facility-level LGD rating and a composite EL rating
Generally speaking, as internal credit risk ratings have been applied to a wider range of more sophisticated uses, so too has the need for more accurate, more differentiated and morequantitative measures of risk.
• By separately assessing default risk and loss given default, two-dimensional systems (and composite rating systems in particular) can:
• improve communication about risk (including by conveying more detailed information about risk profiles and by reducing potential ambiguity over the meaning of risk grades);
• lessen the tendency at some banks to rate primarily on the strength of available security;
• facilitate the development of rating tools to assist in the risk rating process;
• facilitate tracking of the accuracy of risk ratings;

4. Creditworthiness process
5. Morningstar Global Bank Credit Rating Methodology
Credit Score
Like the Morningstar credit rating for nonfinancial companies, the bank credit rating methodology is driven by four key components, or pillars:
1. Bank Solvency Score(30% weighting) is a ranking based on a bank's capital adequacy, asset quality, earnings power, and liquidity profile.
2. Bank Stress Test Score(30% weighting) is an evaluation of a bank's potential to absorb loan losses while maintaining adequate capital levels.
3. Bank Business Risk Score(30% weighting) encompasses various measures of business risk, as well as Morningstar's proprietary Economic Moat and Uncertainty Ratings.
4. Distance...

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