S&P Risk Solutions Outlines Requirements For The Effective Use Of S&P Default Data in Internal Ratings Systems

London - 15 September 2006

Standard & Poor’s Risk Solutions, a leading provider of integrated credit risk solutions, has published a report to assist banks seeking to use Standard & Poor’s ratings default data in their Internal Ratings Based-systems to calculate or validate probability of default estimates satisfy the requirements of Basel II.

The report, titled “Key Factors in Developing, Enhancing and Validating Internal Ratings Systems for Internal Ratings Based Approaches Under Basel II Using Standard & Poor’s Ratings Default Data”, outlines how Standard & Poor’s rating default data can be mapped accurately and consistently by banks using internal rating scales to calculate economic and regulatory capital. It also draws attention to the various qualitative and quantitative factors required within a credit risk assessment framework and how to weight or combine these accordingly.

The treatment of qualitative credit factors such as industry risk, market position and management quality in a template or model, and the application of these factors to the private, unrated segments of low default portfolios, present particular challenges that can easily lead to significant divergence in outcomes between an Internal Ratings Based-system and S&P’s ratings, says Paul Waterhouse, managing director of Standard & Poor’s Risk Solutions.

“Low default sectors present a particular challenge for Internal Rating System development and validation due to either the limited number of defaults or small sector sample sizes on which to develop models based purely on a bank’s historical default experience, ” Mr Waterhouse adds.

“The stability across geographies and sectors of Standard & Poor’s ratings default histories provides an alternative data set to help meet this data gap.”

Become a bobsguide member to access the following

1. Unrestricted access to bobsguide
2. Send a proposal request
3. Insights delivered daily to your inbox
4. Career development