Table Of ContentPalgrave Macmillan Studies in Banking and Financial Institutions
Series Editor: Professor Philip Molyneux
The Palgrave Macmillan Studies in Banking and Financial Institutions are inter-
national in orientation and include studies of banking within particular coun-
tries or regions, and studies of particular themes such as Corporate Banking, Risk
Management, Mergers and Acquisition. The books’ focus is on research and prac-
tice, and they include up-to-date and innovative studies on contemporary topics
in banking that will have global impact and influence.
Titles include :
Jes Villa
ETHICS IN BANKING
The Role of Moral Values and Judgements in Finance
Dimitrios D. Thomakos, Platon Monokroussos & Konstantinos
I. Nikolopoulos ( editors)
A FINANCIAL CRISIS MANUAL
Reflections and the Road Ahead
Elena Beccalli and Federica Poli ( editors)
BANK RISK, GOVERNANCE AND REGULATION
LENDING, INVESTMENTS AND THE FINANCIAL CRISIS
Domenico Siclari ( editor)
ITALIAN BANKING AND FINANCIAL LAW (3 volumes)
Supervisory Authorities and Supervision
Intermediaries and Markets
Crisis Management Procedures, Sanctions, Alternative Dispute Resolution
Systems and Tax Rules
Dr. Fayaz Ahmad Lone
ISLAMIC FINANCE
Its Objectives and Achievements
Valerio Lemma
THE SHADOW BANKING SYSTEM
Creating Transparency in the Financial Markets
Imad A. Moosa
GOOD REGULATION, BAD REGULATION
Elisa Menicucci
FAIR VALUE ACCOUNTING
Key Issues Arising from the Financial Crisis
Anna Omarini
RETAIL BANKING
Business Transformation and Competitive Strategies for the Future
Yomi Makanjuola
BANKING REFORM IN NIGERIA FOLLOWING THE 2009 FINANCIAL
CRISIS
Ted Lindblom, Stefan Sjogren and Magnus Willeson ( editors )
GOVERNANCE, REGULATION AND BANK STABILITY
FINANCIAL SYSTEMS, MARKETS AND INSTITUTIONAL CHANGES
Gianluca Mattarocci
ANOMALIES IN THE EUROPEAN REITS MARKET
Evidence from Calendar Effects
Joseph Falzon ( editor )
BANK PERFORMANCE, RISK AND SECURITISATION
BANK STABILITY, SOVREIGN DEBT AND DERIVATIVES
Josanco Floreani and Maurizio Polato
THE ECONOMICS OF THE GLOBAL STOCK EXCHANGE INDUSTRY
Rym Ayadi and Sami Mouley
MONETARY POLICIES, BANKING SYSTEMS, REGULATION AND GROWTH IN
THE SOUTHERN MEDITERRANEAN
Gabriel Tortella, Ruiz García and Luis José
SPANISH MONEY AND BANKING
A History
Caner Bakir
BANK BEHAVIOR AND RESILIENCE
Jill M. Hendrickson
FINANCIAL CRISIS
The United States in the Early Twenty-First Century
Palgrave Macmillan Studies in Banking and Financial Institutions
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Hampshire RG21 6XS, England
Credit Rating and Bank–
Firm Relationships
New Models to Better Evaluate SMEs
Michele Modina
Associate Professor of Business Economics and Management,
Università degli Studi del Molise, Italy
© Michele Modina 2015
All rights reserved. No reproduction, copy or transmission of this
publication may be made without written permission.
No portion of this publication may be reproduced, copied or transmitted
save with written permission or in accordance with the provisions of the
Copyright, Designs and Patents Act 1988, or under the terms of any licence
permitting limited copying issued by the Copyright Licensing Agency,
Saffron House, 6–10 Kirby Street, London EC1N 8TS.
Any person who does any unauthorized act in relation to this publication
may be liable to criminal prosecution and civil claims for damages.
The author has asserted his right to be identified as the author of this work
in accordance with the Copyright, Designs and Patents Act 1988.
First published 2015 by
PALGRAVE MACMILLAN
Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan in the US is a division of St Martin’s Press LLC,
175 Fifth Avenue, New York, NY 10010.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN: 978–1–137–49621–8
This book is printed on paper suitable for recycling and made from fully
managed and sustained forest sources. Logging, pulping and manufacturing
processes are expected to conform to the environmental regulations of the
country of origin.
A catalogue record for this book is available from the British Library.
Library of Congress Cataloging-in-Publication Data
Modina, Michele, 1968–
Credit rating and bank-firm relationships : new models to better
evaluate SMEs / Michele Modina.
pages cm.—(Palgrave Macmillan studies in banking and financial
institutions)
Includes bibliographical references.
ISBN 978–1–137–49621–8 (hardback)
1. Credit ratings. 2. Commercial credit. 3. Small business – Finance.
4. Banks and banking. I. Title.
HG3751.5.M63 2015
332.7′7—dc23 2015018870
Contents
List of Boxes v iii
List of Figures i x
List of Tables x
Introduction 1
Part I Credit Rating and Internal Rating Systems
1 Credit Rating 9
1.1 The distinctive features of credit rating 9
1.2 Literature review 1 0
1.3 Classification and key concepts of credit risk 16
2 Credit Risk Management 20
2.1 C redit Risk Management and Internal Rating
Based (IRB) approach 20
2.2 The approaches for the credit rating assignment 24
2.2.1 The statistical approach 2 6
2.2.2 The judgmental approach 3 2
2.3 Introduction of the IRB methods 34
2.3.1 Characteristics of internal rating systems 3 4
2.3.2 Determination of the risk parameters 4 0
2.3.3 Requirements of the IRB methods 4 3
2.4 The innovations introduced by Basel III 44
3 Internal Rating Systems: A Critical Vision 48
3.1 Strengths and weaknesses of IRS 48
3.2 Rating and the economic cycle 50
3.2.1 A lternatives for dealing with rating during
the credit cycle 5 1
3.2.2 Stressed PD 5 4
3.2.3 Unstressed PD 5 6
3.2.4 R ating and company analysis:
the “hybrid” approach 5 8
3.2.5 Implementation of “hybrid” models 6 0
3.3 Potentiality and criticality of internal rating systems 62
v
vi Contents
Part II Toward a New Architecture of Rating
4 The Generation of New Models 73
4.1 The need to review rating models 73
4.2 A multistage path 7 7
4.3 The new generation of rating models 79
5 Rating Systems: A Dual Track for Screening and Monitoring 84
5.1 Reasons for the dual track 84
5.2 O perational procedures: some evidence from
banking groups 8 6
5.2.1 Screening 86
5.2.2 Monitoring 9 0
6 The New Architecture of Rating Model 95
6.1 The archetype of the new architecture 95
6.2 A new rating model 1 00
6.3 The function of the rating model 105
6.3.1 Segmentation of the clientele 1 05
6.3.2 Sources, timing and depth of calculation 106
6.3.3 Qualitative and sectorial profile 1 07
6.3.4 The manager’s role 1 09
6.3.5 Override process 1 09
6.3.6 Rating quantification 1 09
6.3.7 Pricing formula 1 12
6.3.8 Uses of the model 117
6.4 The monitoring model 1 19
6.4.1 Segmentation, font and calculation modalities 120
Part III Credit Rating in an Evolving Scenario
7 Rating and Bank–Firm Relationship 127
7.1 The strategic interaction between bank and firm 127
7.2 The bank 1 32
7.3 The firm 1 36
8 Rating and Corporate Finance: Implications and
Opportunities 141
8.1 R ating and financial management in a changing world 141
8.2 Financing behavior of SMEs 144
8.3 R ating, capital structure and the creation of value 147
8.4 T he repercussions of rating on financing decisions 152
Contents vii
9 Rating and Bankruptcy Prediction 1 58
9.1 Rating and SMEs funding policy 158
9.2 Contribution to the literature 160
9.2.1 Determinants of firm default 1 60
9.2.2 SMEs credit rating studies 161
9.3 An empirical analysis 163
9.4 Toward a new frontier 168
References 172
Index 179
List of Boxes
2.1 The determination of capital requirement 39
5.1 Description of internal rating systems – default probability
models 87
5.2 Credit monitoring 91
6.1 Description of internal rating systems 97
viii
List of Figures
1.1 A classification of credit risk 16
2.1 The models of information processing 34
3.1 Rating position and economic cycles 53
3.2 Credit losses, economic cycle and rating 55
6.1 The architecture of the model 101
6.2 Phases of rating model 103
6.3 Depth of calculating the financial rating 107
6.4 The manager’s role 110
6.5 The rating quantification 113
6.6 The cut-off limit 121
6.7 Example of calculation 122
8.1 Rating, cost of capital and cost of debt 154
8.2 The different optimal levels of capital structure 155
ix
