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In Rememberance: World Trade Center (WTC)

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Godlewski, Christophe J., "Are Ratings Consistent with Default Probabilities?: Empirical evidence on banks in emerging market economies", Emerging Markets Finance and Trade, Vol. 43, No. 4, (July-August 2007), pp. 5-23.

Abstract: The role of agency ratings as a market-disciplining device, through the production of information on default risk, should grow within Pillar 3 of the Basel II reform. For the role to be efficient, the rating must be effectively consistent with the counterpart's default probability, particularly for emerging markets, where less-developed financial markets, banking-sector accrued opacity, and an inadequate regulatory, institutional, and legal environment affect banks' risk-taking behavior and therefore default risk. This paper uses scoring and mapping methods to study the consistency of bank ratings with their default probabilities in emerging market economies. Results show a correct quantification of agency rating grades, and thus, their consistency. However, mapping results also show that the rating tends to aggregate banks' default risk information into intermediate-low rating grades.

JEL Classification: C35, F39, G21.

Keywords: bank rating, default probability, emerging market economies, market discipline, scoring and mapping methods.

Previously titled: Are Bank Ratings Coherent with Bank Default Probabilities in Emerging Market Economies?

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