Credit Rating Methodology
From Open Risk Manual
Definition
Credit Rating Methodology is an analytic framework (set of considerations, analyses, tools, models and algorithms) that underpin the generation (assignement) of a Credit Rating.
Methodology Components
Credit rating methodologies vary significantly by the market segment (type of issuer) that is being rated. This reflects:
- the available Credit Information
- the nature of borrowers / instruments
- the investor due diligence practices / demands
- legal /regulatory frameworks in different jurisdictions
Indicative components:
- Quantitative Analysis of Corporate Balance Sheet (Financial Ratios, Liquidity) usually from audited reports
- Qualitative Analysis of Corporate Balance Sheet
- Analysis of Operating Performance and Assessment of Operating Plan
- Analysis of Business Profile (Business Model Risk, product mix, quality of management, Internal Governance, SWOT Analysis)
- Analysis of Enterprise Risk Management
- Analysis of Sectoral Profile (business model trends, technological developments) and Comparison with Peers
- Comparison with Industry Benchmarks
- Analysis of Political Risk and FX Lending Risk
- Assessment of Credit Support
- Assessment of legal environment
- Scenario Analysis, Simulation or other tools
The above elements are usually brought together an overall operational [[Credit Rating Process] including any models or tools, intermediate results or assessments, iterative fact finding etc. culminating into a final placement in one or more credit rating scales within a concrete Credit Rating System and an eventual Credit Rating Report.
Issues and Challenges
- Methodologies for different market segments and asset classes can be very inconsistent with each other
See Also
- Credit Rating Model, the concrete algorithm / quantitative procedure
- Credit Rating Philosophy, the conceptual and economic / financial context
