A multivariate analysis of the determinants of Moody's bank financial strength ratings

Pui Han, Winnie POON, Michael Arthur FIRTH, Hung Gay FUNG

    Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

    41 Citations (Scopus)

    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 languageEnglish
    Pages (from-to)267-283
    Number of pages17
    JournalJournal of International Financial Markets, Institutions and Money
    Volume9
    Issue number3
    DOIs
    Publication statusPublished - 1 Aug 1999

    Fingerprint

    Rating
    Multivariate analysis
    Profitability
    Loans
    Latin America
    Logistic regression model
    Debt
    Accounting data
    Asia
    Banking crisis
    Future directions
    Investors
    Country risk
    Incremental
    Credit rating
    Safety
    Credit
    Factors
    Financial data

    Keywords

    • Bank financial strength ratings
    • Logistic regression model

    Cite this

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    title = "A multivariate analysis of the determinants of Moody's bank financial strength ratings",
    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.",
    keywords = "Bank financial strength ratings, Logistic regression model",
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    A multivariate analysis of the determinants of Moody's bank financial strength ratings. / POON, Pui Han, Winnie; FIRTH, Michael Arthur; FUNG, Hung Gay.

    In: Journal of International Financial Markets, Institutions and Money, Vol. 9, No. 3, 01.08.1999, p. 267-283.

    Research output: Journal PublicationsJournal Article (refereed)Researchpeer-review

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    AU - FUNG, Hung Gay

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