The role of non-financial factors in internal credit ratings |
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| Institution: | 1. Frankfurt School of Finance & Management, Sonnemannstr. 9-11, 60314 Frankfurt, Germany;2. European Central Bank, Sonnemannstrasse 20, 60314 Frankfurt am Main, Germany;3. Deutsche Bundesbank, Wilhelm-Epstein-Str. 14, 60431 Frankfurt, Germany;1. University of the Azores, School of Business and Economics, Centre of Applied Economics Studies of the Atlantic, Rua da Mãe de Deus, s/n, 9501-801 Ponta Delgada, Portugal;2. University of the Azores, School of Business and Economics, Rua da Mãe de Deus, s/n, 9501-801 Ponta Delgada, Portugal;1. Professor of Finance, School of Finance, Shanxi University of Finance and Economics, Taiyuan, China;2. Associate Professor of Finance, La Rochelle Business School – Excelia Group, La Rochelle, France;3. Adjunct Faculty of Finance, La Rochelle Business School – Excelia Group, La Rochelle, France;4. Professor of Finance, School of Finance, Yunnan University of Finance and Economics, Kunming, Yunnan, China |
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| Abstract: | Internal credit ratings are expected to gain in importance because of their potential use for determining regulatory capital adequacy and banks' increasing focus on the risk–return profile in commercial lending. Whereas the eligibility of financial factors as inputs for internal credit ratings is widely accepted, the role of non-financial factors remains ambiguous. Analyzing credit file data from four major German banks, we find evidence that the combined use of financial and non-financial factors leads to a more accurate prediction of future default events than the single use of each of these factors. |
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