Abstract
In 1995 Moody's Investors Services inaugurated a new rating service, bank financial strength ratings (BFSRs), that assesses the safety and soundness of banks in over 50 countries. Our study sets out to do some preliminary investigations of this new type of credit rating. We develop logistic regression models to help explain or predict BFSRs. Using bank-specific accounting and financial data we are able to correctly classify or predict BFSRs. These fundamental variables cover the dimensions of risk, loan provision ratios, and profitability. Of the three, loan provisions is the most important factor, followed by risk, and then profitability. Country risk ratings do not appear to be significant explanators of BFSRs. We also find that traditional debt ratings accurately classify BFSRs and this raises the question of whether BFSRs add incremental information. The paper also highlights future directions for our research. One such area is to examine how well BFSRs predict banking crises such as the credit problems currently affecting Asia and Latin America.
| Original language | English |
|---|---|
| Pages (from-to) | 267-283 |
| Number of pages | 17 |
| Journal | Journal of International Financial Markets, Institutions and Money |
| Volume | 9 |
| Issue number | 3 |
| DOIs | |
| Publication status | Published - 1 Aug 1999 |
Bibliographical note
The authors thank an anonymous referee and the editor, Ike Mathur, for helpful comments on a previous version of the paper. The authors also acknowledge the editorial assistance provided by Peter Jackson of the Department of English at Lingnan College, Hong Kong.Funding
Poon and Firth are grateful for a research grant from the Research Committee of Lingnan College, Hong Kong.
Keywords
- Bank financial strength ratings
- Logistic regression model